Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Implied inflation rate in an inflation adjusted SPIA
Old 04-30-2008, 10:36 AM   #1
Recycles dryer sheets
 
Join Date: Oct 2007
Posts: 332
Implied inflation rate in an inflation adjusted SPIA

If you have premium quotes for a single life immediate annuity one inflation adjusted and one without, is there any way to tell what the implied inflation rate the insurance company is using? Would you need the mortality table they are using along with other stuff?
__________________

__________________
cashflo2u2 is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 04-30-2008, 11:23 AM   #2
Thinks s/he gets paid by the post
FIRE'd@51's Avatar
 
Join Date: Aug 2006
Posts: 2,315
I would calculate the yield-to-maturity for each, treating them as fully amortizing bonds with a maturity equal to your life expectancy. The difference in YTM's should be a pretty good estimate of the implied inflation, assuming the fees embedded in each are the same.

BTW, the company will probably tell you what expected inflation rate they are using if you ask. Vanguard told me when I asked them.
__________________

__________________
FIRE'd@51 is offline   Reply With Quote
Old 04-30-2008, 12:42 PM   #3
Recycles dryer sheets
 
Join Date: Oct 2007
Posts: 332
duh! I never thought of asking. Simple is better.
__________________
cashflo2u2 is offline   Reply With Quote
Old 04-30-2008, 02:31 PM   #4
Thinks s/he gets paid by the post
 
Join Date: Oct 2006
Posts: 3,816
Quote:
Originally Posted by FIRE'd@51 View Post
I would calculate the yield-to-maturity for each, treating them as fully amortizing bonds with a maturity equal to your life expectancy. The difference in YTM's should be a pretty good estimate of the implied inflation, assuming the fees embedded in each are the same.

BTW, the company will probably tell you what expected inflation rate they are using if you ask. Vanguard told me when I asked them.
I like your first method better than your second. It seems that the only plausible answer somebody inside could give you is the result of exactly the calculation you did in the first paragraph.

They don't need to assume an inflation rate for inflation-adjusted SPIAs, they simply need to hedge the risk with TIPS or something similar.
They don't need to assume an inflation rate for fixed SPIAs, because they are priced off fiixed bonds.
__________________
Independent is offline   Reply With Quote
Old 04-30-2008, 07:27 PM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 22,384
Quote:
Originally Posted by Independent View Post
I like your first method better than your second. It seems that the only plausible answer somebody inside could give you is the result of exactly the calculation you did in the first paragraph.

They don't need to assume an inflation rate for inflation-adjusted SPIAs, they simply need to hedge the risk with TIPS or something similar.
They don't need to assume an inflation rate for fixed SPIAs, because they are priced off fiixed bonds.
I talked to a life underwriter today. If he is to be believed, this thread is based on an oversimplified premise. Since an individual's annuity purchase will always be small relative to the insurance company's reserves and surplus, annuities are not ordinarily individually hedged. The rate of return assumption for the entire portfolio- bonds, TIPS, forest lands, mortgages, office buildings, etc. is taken as one input. Life expectancy is also more complex than “18 years for a 70 year old man”. It is made up of a group of individual expectancies for living another year, which are then multiplied by the discounted payout for that year.

Likewise, pricing a COLA SPIA relative to a flat payout fixed immediate annuity is informed by a whole set of possible inflation rates, each of which is assigned a probability.

So we can sit here and decide what an insurance company can and can't do, but unless we are life underwriters we really aren't operating with an in-depth understanding.

Ha
__________________
"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
haha is online now   Reply With Quote
Old 04-30-2008, 08:16 PM   #6
Recycles dryer sheets
 
Join Date: Oct 2007
Posts: 332
Quote:
Originally Posted by haha View Post
I

Likewise, pricing a COLA SPIA relative to a flat payout fixed immediate annuity is informed by a whole set of possible inflation rates, each of which is assigned a probability.

So we can sit here and decide what an insurance company can and can't do, but unless we are life underwriters we really aren't operating with an in-depth understanding.

Ha
I don't really need to understand it, I just want to know what it is. Their assumption for an inflation rate, either individually or in the aggregate.
__________________
cashflo2u2 is offline   Reply With Quote
Old 04-30-2008, 08:24 PM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 22,384
Quote:
Originally Posted by cashflo2u2 View Post
I don't really need to understand it, I just want to know what it is. Their assumption for an inflation rate, either individually or in the aggregate.
O-K, I think I will turn that one over to someone else.

Ha
__________________

__________________
"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
haha is online now   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Inflation Adjusted Results babyape FIRECalc support 1 03-15-2007 03:45 PM
which inflation adjustment for SPIA ? JohnEyles FIRE and Money 18 02-09-2007 05:58 PM
How Does Inflation Adjusted Work astroboy FIRE and Money 1 10-07-2005 02:20 AM
Inflation Adjusted Home Profits Means ?? astroboy FIRE and Money 5 03-26-2005 04:42 PM
Vanguard Now Offering Inflation-Adjusted Annuities intercst FIRE and Money 24 01-10-2005 01:14 PM

 

 
All times are GMT -6. The time now is 02:53 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.