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Old 02-27-2011, 08:45 AM   #21
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I usually don't respond twice to the same question/thread, but in this case I'll make an exception.

It has been suggested by those on these thread/forum/other forums that you should not consider an SPIA until your 70's, 80's or beyond; especially in today's low-interest environment.

As one who has an SPIA, I'll just respond in this manner.

1. Many "experts" say that the current rate of interest is low. Yes it is, and I won't debate that fact. However looking at the M* forum (Bogleheads) a comment was made by Taylor Larimore that he received a 10% return on his/DW's SPIA. I know that both Taylor/me purchased an SPIA (he purchased two - DW/me, one) within a similar timeframe of a year or so, but our return is calculated at just under 5%.

Why the difference? Primarily since SPIA returns (if you calculate using an IRR spreadsheet) also represent a return of your own investment/premium. It does not only represent actual returns upon your money.

In my/DW's case, our IRR calculation is based upon a guaranteed 28-year return, which will give us an amount equal to twice (non inflation adjusted) what we paid. If we both/either live longer? Those additional payments will actually increase in percentage gain, month by month. Of course, if we both pass before the 28 year period ends, the remaining payments go to our estate and we are held to that slightly under 5% long term result.

It's not the current interest rate, but also the "longevity credits" that you have to calculate. The older you are the higher rate of monthly income you will receive, regardless of interest rates at the time of purchase. There is simply less time that the insurance company needs to measure risk, and make payments.

2. Regardless of interest rates, one must measure the income vs. the need for that income, regardless of age.

Many folks continue to state that "you must" wait until you are in your 70's, 80's along with the idea that current interest rates are "too low". What they fail to consider is that while rates are low, will the purchase of an SPIA provide a basic level of retirement income, regardless of age?

I mentioned that the primary reason we purchased an SPIA was to provide a base of income for an eleven year period; from the time I retired till age 70, when I will claim SS (for the benefit of my DW). Could I have withdrawn it only from my TIRA (which makes up the bulk of my retirement investment/savings)? Sure.

However, in eleven years, a lot can go wrong with the market. That's why we jointly decided to take 10% of our "stash" and purchase an SPIA, which reduces our ER withdrawals and allows us to continue to be active in the equity/bond markets with the majority of our retirement investments. Remember, we put only 10% of our then retirement assets into an SPIA.

OTOH, over those eleven years (4 down, thus far), the SPIA has provided us with a good base of income while allowing us to delay SS and maximize our benefits (that's another story), regardless of the early age that we purchased it.

Again, I'm not trying to convince anybody. Not everybody can benefit from an SPIA (the only annuity I would consider). However, I'm just trying to give a few thoughts to consider, while "generally accepted facts" are constantly thrown around, without proper context to consider...
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Old 02-27-2011, 09:02 AM   #22
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I usually don't respond twice to the same question/thread, but in this case I'll make an exception.

It has been suggested by those on these thread/forum/other forums that you should not consider an SPIA until your 70's, 80's or beyond; especially in today's low-interest environment.

....
There are many ways to achieve a successful retirement. Some will do it through superior management of their resources and a basic budget.... others through severe belt tightening.... and anything in between. Many ways to get there. Some will wind up in poverty. In the USA... one makes their future bed and has to lay in it.

My reason for buying a SPIA (lifetime annuity) early is that reduces our WR% on the portfolio and provides some amount longevity protection. If anything happens to me, DW (who is not financially saavy) will have a ready income stream (SPIA, my Pension and SS). And let's not forget about making investment mistakes, being ripped off.... by good old fashioned bad decisions, dementia or otherwise, and a plethora of other later life issues that one might never consider that could lead to financial ruin or impairment!

One of my goals is to reduce our risk. Risk mitigation costs.... if not in real terms in the form of opportunity.

DW and I think it is worth it to spend some amount of our nest egg to reduce the chance of having to go back to work or balance our books through belt-tightening. Of course, DW and I are both healthy and DW is from a family of women that live into their late 80's and early 90's
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Old 02-27-2011, 09:33 AM   #23
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4 years ago I was buying CD's from Pen Fed at 6 1/4%, why would someone buy a SPIA at 5%. This January I bought another CD at 5% from Pen Fed for 10 years. Some day I'll understand this but for now I'm confused. I can see Taylor buying one at 10% but why would you buy one at 5%?
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Old 02-27-2011, 09:39 AM   #24
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4 years ago I was buying CD's from Pen Fed at 6 1/4%, why would someone buy a SPIA at 5%. This January I bought another CD at 5% from Pen Fed for 10 years. Some day I'll understand this but for now I'm confused. I can see Taylor buying one at 10% but why would you buy one at 5%?
Did that CD provide you with a consistant monthly income stream, and were you able to withdraw a portion of your principal along the way, along with interest - computed against the initial amount? Did they provide a monthly distribution that could be used to cover your basic expenses? Or did you just lock up your money without any immediate income requirement?

SPIA's are not CD's. Both have their place in a retirement portfolio. Don't confuse the two - they are not equal in use, or in return. While CD's may provide a "superior return", remember that your initial investment is locked up for a specific period of time. SPIA's do not operate in that fashion. You start getting "benefits" every month, upon initial purchase. You are receiving a small portion of your original "invested" amount, along with a portion of gains on your preimum paid. If you wish, your monthly portion of that "original investment amount" can be reinvested, as you wish.

Again, if the CD "route" works for you? Great. I'm just trying to speak about the "common thoughts and misperceptions" as related to SPIA's.

I'll repeat myself. SPIA's are not for everybody. If they fit your plan, great. If not, just don't disregard them based upon "common perceptions" that are discussed on many forums...

BTW, I can't wait for 10 years to get income I need today; my DW expects much, much more... ... In retirement, cashflow is everything. Regardless of the superior rate of return (of CD's and other investments), if it can't be "harvested" to pay the monthly bills, it is of little use, IMHO.

As to the question of why I would do it? It is related to SS benefits, which is an entire different discussion. Feel free to PM me if you want the details...
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Old 02-27-2011, 10:08 AM   #25
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Some basic illustrations compliments of Bob.

Take note of the first two illustrations (which is easy to overlook).... They are contrived scenarios, but they starkly illustrates the differences between the accumulation and withdrawal phases. It shows the risk and the dynamics at work in different scenarios during withdrawal. Obviously an immediate annuity is used for the withdrawal phase... but those illustrations setup the discussion in his paper.


Immediate Annuities in Retirement
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Old 02-27-2011, 10:22 AM   #26
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No, I don't have to wait for the income. They send me a check each month that I use to cover my bills as you do with the SPIA. You had mentioned about giving me back principal each month. No, they don't give me back principal. If you die next year does the SPIA give your family any of the money you invested? Since you have only about 5% in the SPIA can't you take any additional money you need from the 95%? What is the advantage of them sending you principal?

Also, my money may be locked up for a period of time but the SPIA money is gone forever, no?

Sorry, but I just can't wrap my brain about the point to a SPIA if I'm getting more on my money in a CD and I get me money back at the end of the term. I must be missing something but that's OK.
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Old 02-27-2011, 10:23 AM   #27
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And let's not forget about making investment mistakes, being ripped off.... by good old fashioned bad decisions, dementia or otherwise, and a plethora of other later life issues that one might never consider that could lead to financial ruin or impairment!
That's the main reason for me to consider one. I was thinking about this while walking the mutt this morning. On the one hand, I can easily develop my own annuity by setting up auto transfers to my checking account and making conservative investment choices. But what if the old brain blows a fuse and I start making poor choices and get ripped off later in life? Something to think about as I don't have a spouse to spot daily problems.

Not going to do anything in the near future. But as I reach my mid 60's, I might very well buy one to go along with my SS. That way, I will at least be covered in the event I go bonkers down the road.
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Old 02-27-2011, 10:34 AM   #28
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If you die next year does the SPIA give your family any of the money you invested?
Yes it does. Either my DW, or my estate. Remainder value is paid to my (disabled) son's SNT trust if we both pass before the "guaranteed period". The SPIA is not "gone, forever"...

As to additional info, we are also using this to reduce our RMD's (since we have most of our retirement investments in TIRA's). Your CD's cannot be used in that manner, if they are held within a TIRA account.

The purchase of an SPIA removes the preimum amount from the total, considered upon the RMD date of 70.5. Therefore, we have reduced (at the time of purchase) 10% of that amout of consideration (BTW, our TIRA amount has grown since our retirement ).

Again, I'm not saying what you are doing is wrong. There are many ways to the same end. However, I'm saying for us (and in our situation), this "option" does work...
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Old 02-27-2011, 10:37 AM   #29
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Not going to do anything in the near future. But as I reach my mid 60's, I might very well buy one to go along with my SS. That way, I will at least be covered in the event I go bonkers down the road.
I hate to admit it, but that was part of our planning thought, also. It's a b*tch to get old, but even more so if you have not planned for it...
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Old 02-27-2011, 10:45 AM   #30
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If I were in the position to buy a SPIA, I would hold off for now. The rates are so ridiculously low that unless you have a 95+ year life expectancy, you are locking yourself into a pretty weak contract IMO.
Do you know what the rates were on a SPIA were a few years ago when they were decent? I was hoping the fed would start raising the rates by the end of this year so I could put part of my portfolio into a one. Any thoughts on that?
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Old 02-27-2011, 10:53 AM   #31
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Do you know what the rates were on a SPIA were a few years ago when they were decent? I was hoping the fed would start raising the rates by the end of this year so I could put part of my portfolio into a one. Any thoughts on that?

Here are some report that show current payouts and past archived reports. The reported information has changed a little over the years.... but you can see the changes.

Comparative Annuity Reports Home
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Old 02-27-2011, 11:00 AM   #32
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Originally Posted by rescueme View Post
I usually don't respond twice to the same question/thread, but in this case I'll make an exception.

It has been suggested by those on these thread/forum/other forums that you should not consider an SPIA until your 70's, 80's or beyond; especially in today's low-interest environment.

As one who has an SPIA, I'll just respond in this manner.

1. Many "experts" say that the current rate of interest is low. Yes it is, and I won't debate that fact. However looking at the M* forum (Bogleheads) a comment was made by Taylor Larimore that he received a 10% return on his/DW's SPIA. I know that both Taylor/me purchased an SPIA (he purchased two - DW/me, one) within a similar timeframe of a year or so, but our return is calculated at just under 5%.

Why the difference? Primarily since SPIA returns (if you calculate using an IRR spreadsheet) also represent a return of your own investment/premium. It does not only represent actual returns upon your money.

In my/DW's case, our IRR calculation is based upon a guaranteed 28-year return, which will give us an amount equal to twice (non inflation adjusted) what we paid. If we both/either live longer? Those additional payments will actually increase in percentage gain, month by month. Of course, if we both pass before the 28 year period ends, the remaining payments go to our estate and we are held to that slightly under 5% long term result.

It's not the current interest rate, but also the "longevity credits" that you have to calculate. The older you are the higher rate of monthly income you will receive, regardless of interest rates at the time of purchase. There is simply less time that the insurance company needs to measure risk, and make payments.

2. Regardless of interest rates, one must measure the income vs. the need for that income, regardless of age.

Many folks continue to state that "you must" wait until you are in your 70's, 80's along with the idea that current interest rates are "too low". What they fail to consider is that while rates are low, will the purchase of an SPIA provide a basic level of retirement income, regardless of age?

I mentioned that the primary reason we purchased an SPIA was to provide a base of income for an eleven year period; from the time I retired till age 70, when I will claim SS (for the benefit of my DW). Could I have withdrawn it only from my TIRA (which makes up the bulk of my retirement investment/savings)? Sure.

However, in eleven years, a lot can go wrong with the market. That's why we jointly decided to take 10% of our "stash" and purchase an SPIA, which reduces our ER withdrawals and allows us to continue to be active in the equity/bond markets with the majority of our retirement investments. Remember, we put only 10% of our then retirement assets into an SPIA.

OTOH, over those eleven years (4 down, thus far), the SPIA has provided us with a good base of income while allowing us to delay SS and maximize our benefits (that's another story), regardless of the early age that we purchased it.

Again, I'm not trying to convince anybody. Not everybody can benefit from an SPIA (the only annuity I would consider). However, I'm just trying to give a few thoughts to consider, while "generally accepted facts" are constantly thrown around, without proper context to consider...

I appreciate your detailed feedback as well as the many others who have responded to my original post. I apologize for not including additional information in my original post such as age, etc. as I now see its relevance in providing quality feedback.

I am currently in my mid-50's having FIRED at 52. I have enough savings in non-IRA accounts to last until I'm 60. I have no pension to draw from so all the risk is mine to manage my portfolio.

I currently fall within the "Gray Zone" of Otar's scale but am very close to moving into the Green Zone. With a little investing luck over the next 4 years I may move into the "Green Zone". If I go into the Green then a SPIA might not be necessary; however, if I remain in the Gray Zone at 60, the need to unload risk becomes more attractive and prudent.

Hear is where my head is if I decide to purchase an IA:

(1) Since I will be purchasing an Intermediate Annuity at a relatively young age (60), and planning for it lasting into my 90's, my thoughts were to purchase one with inflation adjustment. Although the monthly amounts are considerably less compared to the fixed payments option, the fact that the payout needs to last for over 25+ years, leads me in that direction to maintain the same purchasing power over the life of the IA. The IA would be about 35% of my total portfolio given my current value.

(2) I could hold off purchasing the IA until a later age but my main point in considering one would be "insurance" against devastating things happening to my portfolio early on that could erode my purchasing power down the road. The quotes I've gotten provided a monthly payout with inflation adjustment at 3.5% of initial principal outlay which is line with what I plan to withdraw from other investments to fund my retirement.

Again I appreciate everyone's feedback. Many good points to ponder especially when making a decision of this magnitude that is irrevocable once signed.

Regards,
FreddyW
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Old 02-27-2011, 11:16 AM   #33
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Many good points to ponder especially when making a decision of this magnitude that is irrevocable once signed.
Yep. You don't want to end up being one of the folks attracted to JG Wentworth commercials...
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Old 02-27-2011, 11:37 AM   #34
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(2) I could hold off purchasing the IA until a later age but my main point in considering one would be "insurance" against devastating things happening to my portfolio early on that could erode my purchasing power down the road.
Maybe at 60, when you plan to buy the annuity, you can review your portfolio and "play it by ear" for a few years. If your portfolio is doing wonderfully, you could put off buying it for another year, and so on, and perhaps pay a little less for it later on than you would at age 60. It is possible that SS might eventually help you to put off buying the annuity as well.

I'm not saying that you "must" wait, but simply that it might be helpful to play it by ear after age 60 - - to re-evaluate each year to see if you can wait another year and still maintain the income you require with a reasonable cushion of safety.

I think that since possibly you will need this annuity for minimal living expenses for at least 30 years, you are right in your decision to pay extra for full inflation adjustment.
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Old 02-27-2011, 01:30 PM   #35
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That's the main reason for me to consider one. I was thinking about this while walking the mutt this morning. On the one hand, I can easily develop my own annuity by setting up auto transfers to my checking account and making conservative investment choices. But what if the old brain blows a fuse and I start making poor choices and get ripped off later in life? Something to think about as I don't have a spouse to spot daily problems.

Not going to do anything in the near future. But as I reach my mid 60's, I might very well buy one to go along with my SS. That way, I will at least be covered in the event I go bonkers down the road.
I understand your thinking Dawg. I would be sure to consider indexed annuities, as when I was a young man during the 70s I saw many retirements of formerly very comfortable people pretty much destroyed by inflation. They relied largely on fixed corporate pensions, often supplemented by longer term fixed income investments, or on fixed longer term notes they had taken back from selling a farm or business. When I sold some property that I short-platted, I insisted on contracts with 4 year balloons, and I tried to avoid financing parcels at all whenever possible.

People say, "Oh that was the 70s", implying it is stably different now. I would say that is wishful thinking, not analysis. The inflation of the 70s surprised many people, at least as to how lasting it was. We may or may get inflation, and if we do it may or may not be severe, protracted or whatever. And if we get an inflation, we may or may not come up with the social courage and good leadership to surmount it.

I would never want to be comitted long term to being short inflation.
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Old 03-01-2011, 02:30 AM   #36
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I understand your thinking Dawg. I would be sure to consider indexed annuities, as when I was a young man during the 70s I saw many retirements of formerly very comfortable people pretty much destroyed by inflation. They relied largely on fixed corporate pensions, often supplemented by longer term fixed income investments, or on fixed longer term notes they had taken back from selling a farm or business. When I sold some property that I short-platted, I insisted on contracts with 4 year balloons, and I tried to avoid financing parcels at all whenever possible.

People say, "Oh that was the 70s", implying it is stably different now. I would say that is wishful thinking, not analysis. The inflation of the 70s surprised many people, at least as to how lasting it was. We may or may get inflation, and if we do it may or may not be severe, protracted or whatever. And if we get an inflation, we may or may not come up with the social courage and good leadership to surmount it.

I would never want to be comitted long term to being short inflation.
Ha
Agreed. I'm surprised at how little discussion there is on this forum concerning inflation and its impact on portfolio survival. Personally I'm more concerned about inflation putting me into the retirement poor house than market crashes.

The scary part, to me, concerning the inflation of the 70's was that prices went up and up and up and never recovered. There was no offsetting deflationary period bringing prices back down. Folks that retired into that inflationary period saw prices rise and stay at those higher levels for the balance of their retirement. If they were locked into fixed investments, they had a real danger of ROOM. Not a good time to be counting on a non-cola'd pension, a non-cola'd SPIA and a portfolio of long bonds bearing negative real interest.......

At least with the recent recession, portfolios have generally recovered and it's over until next time.
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