Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Interesting comments on annuities
Old 07-25-2012, 11:51 AM   #1
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Chuckanut's Avatar
 
Join Date: Aug 2011
Location: West of the Mississippi
Posts: 6,326
Interesting comments on annuities

Here are some interesting comments on annuities and using them to guarantee lifetime income by Dr Pfau. It is aimed at advisors.

Deciphering the Annuity Puzzle

Another question: What is the URL of the website that gives the cost of various SPIA's by state?
__________________

__________________
The worst decisions are usually made in times of anger and impatience.
Chuckanut 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 07-25-2012, 11:56 AM   #2
Thinks s/he gets paid by the post
MasterBlaster's Avatar
 
Join Date: Jun 2005
Posts: 4,359
Quote:
Originally Posted by Chuckanut View Post
What is the URL of the website that gives the cost of various SPIA's by state?
Here's one website:

Immediate Annuities - Instant Annuity Quote Calculator.

I have no idea if their prices are competitive or not. Also note that these are not inflation-indexed SPIA's.
__________________

__________________
MasterBlaster is offline   Reply With Quote
Old 07-25-2012, 12:12 PM   #3
Thinks s/he gets paid by the post
MasterBlaster's Avatar
 
Join Date: Jun 2005
Posts: 4,359
I didn't read the article.

But as I understand things you can buy a SPIA with some of your nestegg to insure you don't ever have to eat dogfood. And then invest the remainder more aggressively. Your spending plan could also be more agressive. Perhaps you could insure a portion of the remaining nestegg is totally spent by a certain age.

In that manner you just may have more spe4ndable income over you remaining lifespan.

The alternative is to (most certainly) go out with a large not yet fully spent-down nestegg.
__________________
MasterBlaster is offline   Reply With Quote
Old 07-25-2012, 12:22 PM   #4
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,836
The USA is a bit strange in it's general avoidance of annuity products to fund retirement. Maybe this is a fairly recent trend with the growth of defined contribution products. In many countries annuities are far more common and often are the default option; this is the case in the UK. Unfortunately the UK annuity industry is full of abuses, hidden fees and fee levels that make my eye's water.
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”

Current AA: 65% Equity Funds / 20% Bonds / 7% Stable Value /3% Cash / 5% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
nun is offline   Reply With Quote
Old 07-25-2012, 02:31 PM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,412
Quote:
Originally Posted by nun View Post
The USA is a bit strange in it's general avoidance of annuity products to fund retirement. Maybe this is a fairly recent trend with the growth of defined contribution products. In many countries annuities are far more common and often are the default option; this is the case in the UK. Unfortunately the UK annuity industry is full of abuses, hidden fees and fee levels that make my eye's water.
WADR, I think its a bit strange that in the UK they continue to be so enthusiastic for these products given the abuses, hidden fees, etc.
__________________
pb4uski is offline   Reply With Quote
Old 07-25-2012, 03:55 PM   #6
Thinks s/he gets paid by the post
MasterBlaster's Avatar
 
Join Date: Jun 2005
Posts: 4,359
Quote:
Originally Posted by pb4uski View Post
WADR, I think its a bit strange that in the UK they continue to be so enthusiastic for these products given the abuses, hidden fees, etc.
Do we need distinguish between immediate annuities (which the OP's linked article refers) and variable annuities or whole life type policies. It's pretty hard to hide fees in a SPIA. The variable annuities etc have the bad reputation about fees and insurance company shenanigans.

SPIA's can indeed have their place as the linked article suggests.
__________________
MasterBlaster is offline   Reply With Quote
Old 07-25-2012, 05:09 PM   #7
Thinks s/he gets paid by the post
imoldernu's Avatar
 
Join Date: Jul 2012
Location: Peru
Posts: 4,616
Quote:
Here are some interesting comments on annuities and using them to guarantee lifetime income by Dr Pfau. It is aimed at advisors.
Thanks for the article. Made sense to me. I took it to mean "find the investor's philosophy" with the base decision based on "Legacy". Health and Genes are the two other points that talk to me.
__________________
imoldernu is offline   Reply With Quote
Old 07-25-2012, 07:29 PM   #8
Thinks s/he gets paid by the post
 
Join Date: Oct 2006
Posts: 3,815
Pfau does a fine job of explaining why people don't buy SPIAs. In most cases, I'd say their reasons are "rational".

The one thing he didn't mention is that there is very little cost in waiting to purchase. If I think I've got a reasonable cushion, and I'm concerned about the insurance company failing, I think I would defer even if I believe that an annuity will ultimately be the right choice.
__________________
Independent is offline   Reply With Quote
Old 07-26-2012, 08:59 AM   #9
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
travelover's Avatar
 
Join Date: Mar 2007
Posts: 9,878
Quote:
Originally Posted by MasterBlaster View Post
Do we need distinguish between immediate annuities (which the OP's linked article refers) and variable annuities or whole life type policies. It's pretty hard to hide fees in a SPIA. The variable annuities etc have the bad reputation about fees and insurance company shenanigans.

SPIA's can indeed have their place as the linked article suggests.
I agree. Annuities get a pretty broad brush treatment, but they are simply another form of insurance, whose purpose is to spread risk. I don't see any inherent reason by they should be products designed to screw people any more than say, life insurance or auto insurance. Not that that hasn't been the case due to weak regulation and ever present human greed.
__________________
Yes, I have achieved work / life balance.
travelover is offline   Reply With Quote
Old 07-26-2012, 01:19 PM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
easysurfer's Avatar
 
Join Date: Jun 2008
Posts: 7,885
Quote:
Originally Posted by travelover View Post
I agree. Annuities get a pretty broad brush treatment, but they are simply another form of insurance, whose purpose is to spread risk. I don't see any inherent reason by they should be products designed to screw people any more than say, life insurance or auto insurance. Not that that hasn't been the case due to weak regulation and ever present human greed.
I think like most insurance products, at time of purchase, they feel like a waste of money, until you really need it. Then you look like a genius .
__________________
Have you ever seen a headstone with these words
"If only I had spent more time at work" ... from "Busy Man" sung by Billy Ray Cyrus
easysurfer is online now   Reply With Quote
Old 07-26-2012, 02:32 PM   #11
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Midpack's Avatar
 
Join Date: Jan 2008
Location: Chicagoland
Posts: 11,970
Quote:
Originally Posted by Independent View Post
Pfau does a fine job of explaining why people don't buy SPIAs. In most cases, I'd say their reasons are "rational".

The one thing he didn't mention is that there is very little cost in waiting to purchase. If I think I've got a reasonable cushion, and I'm concerned about the insurance company failing, I think I would defer even if I believe that an annuity will ultimately be the right choice.
+1. The article does a good job of laying out all the reasons people are reluctant to purchase SPIA's. However it doesn't (as I hoped) seem to provide advisors (or others) much info to encourage clients to consider a SPIA as a more attractive piece in retirement income planning.

Again, purchasing SPIAs remains part of my plan B, though it seems like it will make more sense when we're in our 70's or thereabouts.

I am still hoping Dr Pfau or someone will write an article with specifics quantifying using SPIAs for floor income and remaining investments for other purposes (discretionary spending, bequests, LTC, other) over the long term. But I guess advisors would rather we go to them for answers...so I'm not holding my breath waiting.
__________________
No one agrees with other people's opinions; they merely agree with their own opinions -- expressed by somebody else. Sydney Tremayne
Retired Jun 2011 at age 57

Target AA: 60% equity funds / 35% bond funds / 5% cash
Target WR: Approx 2.5% Approx 20% SI (secure income, SS only)
Midpack is online now   Reply With Quote
Old 07-26-2012, 03:16 PM   #12
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2004
Posts: 11,615
Quote:
Originally Posted by Midpack View Post
Again, purchasing SPIAs remains part of my plan B, though it seems like it will make more sense when we're in our 70's or thereabouts.
That's our plan, too.
Quote:
Originally Posted by Midpack View Post
I am still hoping Dr Pfau or someone will write an article with specifics quantifying using SPIAs for floor income and remaining investments for other purposes (discretionary spending, bequests, LTC, other) over the long term.
Another issue that bears on the problem: The higher the provided social safety net becomes, the more disincentives there are to building your own. It might not make much sense to construct a "just in case" income stream that (barely) keeps you out of poverty since that income stream will disqualify you for many taxpayer-funded benefits. You could instead just keep spending down the nest egg until you qualify for the social benefits for which you've been taxed all those years.
__________________
"Freedom begins when you tell Mrs. Grundy to go fly a kite." - R. Heinlein
samclem is offline   Reply With Quote
Old 07-26-2012, 03:45 PM   #13
Thinks s/he gets paid by the post
 
Join Date: Mar 2009
Posts: 1,433
Interesting subject. I read the subject matter hoping to find a new reason or justification to purchase an annuity. After reading all the posts my position remains as others have stated before. I'll keep a SPIA in mind as a backup plan if I find my assets being depleated faster than anticipated. Meanwhile I'll stick to my current investment plan.
__________________
Retired in 2016. Living off dividends / interest and a mini pension. Freedom.
foxfirev5 is offline   Reply With Quote
Old 07-26-2012, 10:27 PM   #14
Recycles dryer sheets
 
Join Date: Dec 2011
Posts: 388
Quote:
Originally Posted by Midpack View Post

Again, purchasing SPIAs remains part of my plan B, though it seems like it will make more sense when we're in our 70's or thereabouts.
Not necessarily. By waiting you might get a better interest rate since rates are low now, but that is not at all certain. What is certain is that by waiting you forego some of the mortality credits since not too many co-annuitants will have dropped off in their 60's.
__________________
Khufu is offline   Reply With Quote
Old 07-27-2012, 04:28 AM   #15
Thinks s/he gets paid by the post
obgyn65's Avatar
 
Join Date: Sep 2010
Location: midwestern city
Posts: 4,061
After reading many posts about annuities on this website for the last couple of years, I have decided to invest about 1% of my NW in deferred annuities. I am 47, and the payout when I turn 62 is about 12%. My spreadsheet likes it.
__________________
Very conservative with investments. Not ER'd yet, 48 years old. Please do not take anything I write or imply as legal, financial or medical advice directed to you. Contact your own financial advisor, healthcare provider, or attorney for financial, medical and legal advice.
obgyn65 is offline   Reply With Quote
Old 07-27-2012, 09:50 AM   #16
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Midpack's Avatar
 
Join Date: Jan 2008
Location: Chicagoland
Posts: 11,970
Quote:
Originally Posted by Khufu View Post
Not necessarily. By waiting you might get a better interest rate since rates are low now, but that is not at all certain. What is certain is that by waiting you forego some of the mortality credits since not too many co-annuitants will have dropped off in their 60's.
Not sure I follow as mortality credits are actuarilly greater the longer one waits.

Interest rates are not going to fall further, they can only remain the same or increase, so that's a reason to wait if possible. Apart from interest rates, annuities get less expensive the longer one waits simply due to fewer years to fund. And all the reasons potential annuitants hesitate that Dr Pfau lays out in the article, are more than enough to persuade me to wait. YMMV
__________________
No one agrees with other people's opinions; they merely agree with their own opinions -- expressed by somebody else. Sydney Tremayne
Retired Jun 2011 at age 57

Target AA: 60% equity funds / 35% bond funds / 5% cash
Target WR: Approx 2.5% Approx 20% SI (secure income, SS only)
Midpack is online now   Reply With Quote
Old 07-27-2012, 02:32 PM   #17
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 16,459
I have been expecting interest rates to stay low for a while, and it could be much longer according to this persuasive paper from Hoisington Management. http://www.hoisingtonmgt.com/pdf/HIM2012Q2NP.pdf

I only bring it up for folks who are counting on interest rates to rise before purchasing an annuity. What if they don't for another 15 years?
__________________
Well, I thought I was retired. But it seems that now I'm working as a travel agent instead!
audreyh1 is offline   Reply With Quote
Old 07-27-2012, 02:50 PM   #18
Thinks s/he gets paid by the post
 
Join Date: Mar 2010
Posts: 1,648
Quote:
Originally Posted by obgyn65 View Post
After reading many posts about annuities on this website for the last couple of years, I have decided to invest about 1% of my NW in deferred annuities. I am 47, and the payout when I turn 62 is about 12%. My spreadsheet likes it.
Wow obgyn65...where did you get that payout if you don't mind my asking. Is it a guaranteed payout? In recent years going back to 2007/2008 the most I heard of was 8% or 7% and those quickly went away after the bust. 5% is about as high as I have heard of in the last 2 years. Does it include some extra payout on top of what the contract says?
__________________
sheehs1 is offline   Reply With Quote
Old 07-27-2012, 03:49 PM   #19
gone traveling
 
Join Date: Apr 2009
Location: Eastern PA
Posts: 3,851
Quote:
Originally Posted by audreyh1 View Post
I only bring it up for folks who are counting on interest rates to rise before purchasing an annuity. What if they don't for another 15 years?
You simply "eat" your "seed corn" (e.g. the money you were going to use for an SPIA) to provide current income.

If you can afford to wait till a much later age, then the SPIA really was not needed in the first place, IMHO.

The reality is that your payments in the future will be higher (sometimes much more so) for the same reason why SS payments are higher if you wait. The majority of that enhanced payment is due to the simple fact that you will have a shorter lifespan to cover. Current interest rates have less of an impact.

The SPIA we have is in the form "Joint Life w/Certain Period". It will pay for our lifetimes (survivor at 100%) but if both pass before the term runs out, the remaining payments go to our named beneficiary.

Looking back, we certainly could have gotten along without the SPIA (purchased at joint age of 59), but it met our multiple goals at the time; that is to act as a pension (I have none, DW has two small ones, payable at age 65), remove a bit of our joint portfolio, along with the investment risk, and lastly - allow us to delay the start of our respective SS till age 66 for DW and age 70 for me.

Delay of SS will allow me to claim 50% of DW's SS for four years, delaying mine till age 70 primarily for the benefit of DW (assuming I die first). It also allows my SS to grow 8% a year (plus any COLA's) during that four year period.

Of course, it's easy to say a plan was a good decision (as I believe ours was, to cover several key points of retirement income) but you really don't know until all is said and done. Heck, interest rates could have gone through the roof since we purchased the SPIA in 2007. As it is, that wasn’t the case and rates today are less than that time. Can't beat dumb luck.

BTW, we decided to go with a non-COLA'ed SPIA to maximize our monthly retirement income from that vehicle in the early years. Since we really only purchased it to cover the period (11 years) until we were both on SS, it worked out. We could have gone for just a term contract, but we figured the SPIA income would just be "icing on the cake" in our later years, and assuming inflation will greatly reduce its value over time.

An annuity (specifically an SPIA) is not for everybody. You have to consider it as part of a total retirement income plan, not just a fall-back option if you get into trouble down the road. By that time, you may not have the money to even consider it.

Just my simple POV, from somebody who is actually using the product.
__________________
rescueme is offline   Reply With Quote
Old 07-27-2012, 03:56 PM   #20
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Midpack's Avatar
 
Join Date: Jan 2008
Location: Chicagoland
Posts: 11,970
Quote:
Originally Posted by audreyh1 View Post
I have been expecting interest rates to stay low for a while, and it could be much longer according to this persuasive paper from Hoisington Management. http://www.hoisingtonmgt.com/pdf/HIM2012Q2NP.pdf

I only bring it up for folks who are counting on interest rates to rise before purchasing an annuity. What if they don't for another 15 years?
As you know, the annuity cost will of course decline just because we're older with fewer years to fund. Interest rates can't go lower so there's no downside interest rate risk. So when/if we buy they'll be cheaper, and if interest rates rise, cheaper still and all the better - that much more discretionary nest egg to work with after annuitizing. So we balance risk and return to protect principal and monitor our annuitization hurdle in the meantime and hope for average or better investment performance (I'm not holding my breath, but history is on our side). If we were at or near our full income (projected spending) annuity hurdle or or emotional/risk tolerance made waiting untenable at any time in the years ahead, we'd seriously consider starting to annuitize. YMMDV
__________________

__________________
No one agrees with other people's opinions; they merely agree with their own opinions -- expressed by somebody else. Sydney Tremayne
Retired Jun 2011 at age 57

Target AA: 60% equity funds / 35% bond funds / 5% cash
Target WR: Approx 2.5% Approx 20% SI (secure income, SS only)
Midpack is online now   Reply With Quote
Reply

Tags
annuities pfau


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


 

 
All times are GMT -6. The time now is 12:34 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.