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Old 07-22-2010, 09:38 AM   #61
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When asked whether she prefers 1) a smaller initial payout, but one that increases with inflation, or 2) a larger initial payout with an ever eroding purchasing power, she much prefers 1).

She is still young, healthy and has good family genetics. So she could potentially live another 30 years and that seems like a loooong time to go without COLA or inflation protection (especially considering that many experts see higher inflation down the road). In addition, I am tired of having her financial problems hanging over our heads. So I want her to get set financially for the long term. The higher initial payouts on non-COLA SPIAs might sound great right now, but if her income falls behind in 10 years due to inflation, we will be right back where we are now except she won't have any more assets to monetize. Guess who will be left holding the bag? By then, DW and I will have been retired for a while and any money we give her will have to come from our discretionary budget. Heck no. I want her SPIA payout to be as close to a SS check as possible.
Just doing some quick Excel math and running the numbers, it would take her 12 years just to catch up to the Penn Mutual payment and 23 years to make up the difference in payments not received over the first 12 years. She would be 90 years old at that point and that doesn't even take into consideration the time value of money.
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Old 07-22-2010, 09:40 AM   #62
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Just doing some quick Excel math and running the numbers, it would take her 12 years just to catch up to the Penn Mutual payment and 23 years to make up the difference in payments not received over the first 12 years. She would be 90 years old at that point and that doesn't even take into consideration the time value of money.
What inflation rate are you using?
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Old 07-22-2010, 09:41 AM   #63
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What inflation rate are you using?
Sorry, should have noted that was using a 2% COLA and the Mass Mutual payment. Pick an inflation rate and I can re-run for you under the AIG payment.
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Old 07-22-2010, 09:44 AM   #64
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Gosh, if higher inflation is truly on the horizon, what about 4 or 5% average?
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Old 07-22-2010, 09:52 AM   #65
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Gosh, if higher inflation is truly on the horizon, what about 4 or 5% average?
Using 4% it would take ~10 years to start paying out more than PM and ~8-9 years past that to make up the difference in payments not received in the first 10 years. That again does not take into consideration the time value of money and still puts her at age 85-86. Assuming 4% inflation is a pretty big "if" given all the talk about deflation. Just a couple years of deflation or inflation lower than 4% would make a big change in those numbers. Definitely more of a crap-shoot going with the full CPI if you ask me. Here's what I come up with:

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Old 07-22-2010, 09:55 AM   #66
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Using 4% it would take ~10 years to start paying out more than PM and ~8-9 years past that to make up the difference in payments not received in the first 10 years. That again does not take into consideration the time value of money and still puts her at age 85-86. Assuming 4% inflation is a pretty big "if" given all the talk about deflation. Just a couple years of deflation or inflation lower than 4% would make a big change in those numbers. Definitely more of a crap-shoot going with the full CPI if you ask me.
IMO this is more about mitigating risk than maximizing return. MIL shoudl do whatever she can live with that lays off the most risk she can offload, which may not be the option with the highest total payout.
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Old 07-22-2010, 09:58 AM   #67
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IMO this is more about mitigating risk than maximizing return. MIL shoudl do whatever she can live with that lays off the most risk she can offload, which may not be the option with the highest total payout.
I agree, and going with the AIG with full CPI has the most risk. PM still looks like the best option out of what was posted IMO.

OP - Did you check the SPIA rates with New York Life? They are known to have higher SPIA rates than most. I also just ran some quick rates on a site I googled and it came up with a SPIA rate with no CPI/COLA of $669/month. Doesn't say what company it's with.

Just throwing another idea out there, but given the heavy consensus that interest rates will need to rise in the future, what about a 5-6 year fixed annuity where she can draw up to 10% each year with no surrender charges? In this scenario the surrender charge on a life-only SPIA is 100% (since she can't get the money back) whereas on the fixed annuity she could also pull the money out and pay the surrender charge if a better opportunity came along and she really wanted to.

On $100k she could withdraw the same ~$7200/year while still earning interest on the remaining balance. Current rates are ~3-3.5% on a fixed annuity with a good company. At the end of the 5-6 years she could buy a SPIA with the remaining funds at that point at a likely higher interest rate than she is getting now, along with having a higher payout percentage given the older age.
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Old 07-22-2010, 10:10 AM   #68
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I agree, and going with the AIG with full CPI has the most risk. PM still looks like the best option out of what was posted IMO.

OP - Did you check the SPIA rates with New York Life? They are known to have higher SPIA rates than most. I also just ran some quick rates on a site I googled and it came up with a SPIA rate with no CPI/COLA of $669/month. Doesn't say what company it's with.
I haven't checked NY Life yet.

Personally, I can see how the Penn Mutual offer is competitive with the 2% COLA from the Mass Mutual offer. But I fail to see how the AIG with full CPI has more risk. The only downside I see is, if inflation is tame over the next decades, MIL would have left some money on the table compared to the PM offer. That would be a cost, but hardly a "risk". The biggest risk is underinsuring against inflation, IMO. And I want to export that risk.

Note: The AIG annuity protects against both inflation and deflation as the payout can never go lower than the initial payout.
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Old 07-22-2010, 10:14 AM   #69
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I haven't checked NY Life yet.

Personally, I can see how the Penn Mutual offer is competitive with the 2% COLA from the Mass Mutual offer. But I fail to see how the AIG with full CPI has more risk. The only downside I see is, if inflation is tame over the next decades, MIL would have left some money on the table compared to the PM offer. That would be a cost, but hardly a "risk". The biggest risk is underinsuring against inflation, IMO. And I want to export that risk.

Note: The AIG annuity protects against both inflation and deflation as the payout can never go lower than the initial payout.
The payout can't go below the initial payout, but does that mean it can't go down from what it was the year before? Just for the sake of the numbers, let's say there was 4% inflation in years 1-3, then 4% deflation in years 4-5 (unlikely, but just asking). Would the payment still be given at the level it was after year 3, or can it go down all the way to its original level that started in year 1?

If inflation is the biggest concern versus the income over the next 10 years and you think she will likely live 15-30 years, then by all means go in that direction. Obviously this is a personal decision and it really comes down to what is most important to you since the numbers aren't fixed on a CPI-adjusted annuity.
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Old 07-22-2010, 10:20 AM   #70
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The payout can't go below the initial payout, but does that mean it can't go down from what it was the year before? Just for the sake of the numbers, let's say there was 4% inflation in years 1-3, then 4% deflation in years 4-5 (unlikely, but just asking). Would the payment still be given at the level it was after year 3, or can it go down all the way to its original level that started in year 1?
In other words, is it like a Series I Savings bond (which never loses value and for which deflation doesn't offset future inflation adjustments) or like TIPS (which can fall to a value below par during deflationary periods but is guaranteed to pay at least par when held to maturity)?
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Old 07-22-2010, 10:24 AM   #71
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The payout can't go below the initial payout, but does that mean it can't go down from what it was the year before? Just for the sake of the numbers, let's say there was 4% inflation in years 1-3, then 4% deflation in years 4-5 (unlikely, but just asking). Would the payment still be given at the level it was after year 3, or can it go down all the way to its original level that started in year 1?

If inflation is the biggest concern versus the income over the next 10 years and you think she will likely live 15-30 years, then by all means go in that direction. Obviously this is a personal decision and it really comes down to what is most important to you since the numbers aren't fixed on a CPI-adjusted annuity.
You are right, the payout can go down from year to year if CPI is negative, but it can never fall below the initial payout. So it's like a TIPS: the value can go up or down, but you are guaranteed to get at least your principal back at maturity.

Current income is an issue of course. But a somewhat stable purchasing power over the next decades is an overriding concern for MIL.
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Old 07-22-2010, 10:37 AM   #72
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You are right, the payout can go down from year to year if CPI is negative, but it can never fall below the initial payout. So it's like a TIPS: the value can go up or down, but you are guaranteed to get at least your principal back at maturity.

Current income is an issue of course. But a somewhat stable purchasing power over the next decades is an overriding concern for MIL.
The AIG annuity will protect against large inflation percentages, but again for the sake of argument, let's say inflation averaged 3% and we throw in two years of 2% deflation somewhere. In that case, it would take 16 years for the AIG annuity to start paying more than PM and 29 years just to catch up on the money lost in the first 16 years, again not including time value of money. If you could find out which company would give her a life-only SPIA of $669/month instead of $611/month, those numbers become 19 years and 35 years, at which point she'd be 102. I would be surprised if inflation averaged 4% over 20-30 years. Just some food for thought.
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Old 07-22-2010, 10:57 AM   #73
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NY Life: $570/month, single life only, 100K premium, no inflation protection.
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Old 07-22-2010, 11:03 AM   #74
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The AIG annuity will protect against large inflation percentages, but again for the sake of argument, let's say inflation averaged 3% and we throw in two years of 2% deflation somewhere. In that case, it would take 16 years for the AIG annuity to start paying more than PM and 29 years just to catch up on the money lost in the first 16 years, again not including time value of money. If you could find out which company would give her a life-only SPIA of $669/month instead of $611/month, those numbers become 19 years and 35 years, at which point she'd be 102. I would be surprised if inflation averaged 4% over 20-30 years. Just some food for thought.
As I said previously:

Quote:
But I fail to see how the AIG with full CPI has more risk. The only downside I see is, if inflation is tame over the next decades, MIL would have left some money on the table compared to the PM offer. That would be a cost, but hardly a "risk". The biggest risk is underinsuring against inflation, IMO. And I want to export that risk.
We don't know what inflation is going to be. If we insure against inflation, there might be a cost. If we under-insure against inflation, there might be a risk. I would prefer to pay the cost than take the risk.
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Old 07-22-2010, 11:13 AM   #75
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As I said previously:

We don't know what inflation is going to be. If we insure against inflation, there might be a cost. If we under-insure against inflation, there might be a risk. I would prefer to pay the cost than take the risk.
Sounds like you've sold yourself on AIG and she's in agreement with you.

I'd be curious what company was offering $669/month though....that's a pretty substantial difference versus $435 to start with.
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Old 07-22-2010, 11:36 AM   #76
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There isn't much commission in a $100k SPIA with any company. You're not talking a $1 million annuity here.
The OP stated that he requested quotes for a SPIA with a COLA but instead received quotes for variable annuities. I'm sure it was just an honest mistake by the agent and had nothing to do with the increased commissions they would get from a variable annuity.
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Old 07-22-2010, 11:39 AM   #77
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The OP stated that he requested quotes for a SPIA with a COLA but instead received quotes for variable annuities. I'm sure it was just an honest mistake by the agent and had nothing to do with the increased commissions they would get from a variable annuity.
That I can agree with. Either that or the company's SPIA rates were a joke and knew the conversation would end there....or a combination of both.
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Old 07-22-2010, 12:13 PM   #78
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I know you mentioned above that she just started SS three months ago. However, she could still do a "blended" approach. If she is getting $1100 per month from SS now, she could hold back about 40K (3 years worth of SS) from funds currently earmarked for a SPIA, with the plan to repay and restart SS at age 70. This would increase her monthly SS check by $267 in today's $, a better return (8% withdrawal rate) on that 40K than any of the COLA'd products mentioned here. Additionally, you get the US government guarantee, along with the fact that, at most, 85% of SS is taxable under current law, versus 100% with a qualified SPIA. Also, SS is not taxable by most states - I don't know about a qualified SPIA.

Perhaps you and she will decide that the monthly $ difference isn't worth the trouble, but we do try to optimize things here. After all, the finance books all say "more is better than less".
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Old 08-05-2010, 02:53 PM   #79
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First, let me thank all of you who participated in the conversation.

MIL has finally signed her annuity contracts. After looking more carefully at reverse mortgages and receiving several quotes, she decided to go with a HECM reverse mortgage from Wells Fargo (lowest fees/costs we could find).

Her monthly income will look something like:
$1,000 from SS (CPI-adjusted)
$435 from a Vanguard Lifetime Annuity Program SPIA (CPI-adjusted)
$611 from a Penn Mutual SPIA (no COLA)
$636 from Wells Fargo reverse mortgage (no COLA) - Just based on what we (and the county) think her house is worth. Waiting for an appraisal for the final number.

Total: $2,682 monthly. Her expenses stand roughly at $2,500 per month right now (all included).

It also leaves her about $30K liquid for emergencies. The interests and dividends from that money could give her a small annual bonus.

The whole process has, I think, jolted her into reality. She has (finally!) decided to voluntarily reduce her expenses. She is ditching her expensive cell phone plan and going with a pre-paid T-mobile plan. The cleaning lady was let go. She will be shopping for a cheaper Medicare supplemental plan in the fall. Things are looking up!
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Old 08-05-2010, 03:51 PM   #80
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Total: $2,682 monthly. Her expenses stand roughly at $2,500 per month right now (all included).

It also leaves her about $30K liquid for emergencies. The interests and dividends from that money could give her a small annual bonus.
Sounds like a decent outcome. Her current spending needs are met and roughly 1/2 her income stream is COLA'd. Should be at least a few years before inflation starts taking a toll on purchasing power.

Given that you and your DW are the ultimate honey pot, this plan should limit your exposure to that particular risk for quite a while. And limit the extent of the risk long term (ie you won't be hit up for basic expense money for quite a while since she has a partially COLA'd income stream).

I wish we could get my in-laws this level of income stream since DW and I will likely be the honey pot for my parents in law. They will be stuck with something like a 30k money market account and meager SS payments, plus probably public assistance.
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