Interesting comments on annuities

[Chuckanut]

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?

 

[MasterBlaster]

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]

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.

 

[nun]

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.

 

[pb4uski]

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.

 

[MasterBlaster]

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.

 

[imoldernu]

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.

 

[Independent]

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.

 

[travelover]

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.

 

[easysurfer]

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 .

 

[Midpack]

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.

 

[samclem]

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.

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.

 

[foxfirev5]

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.

 

[Khufu]

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.

 

[obgyn65]

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.

 

[Midpack]

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

 

[audreyh1]

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?

 

[sheehs1]

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?

 

[rescueme]

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.

 

[Midpack]

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

 

[brewer12345]

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?

Sounds like a deferred payout annuity AKA longevity insurance. He will not get a payout for another 15 years (giving the insurer time to compound the money) and will get nothing if he croaks in the interim (providing mortality credits to him if he does live long enough to collect). I am too young now, but may be very interested in a similar strategy as I get older.

Obgyn, I hope you chose the insurer carefully. You will be exposed to them for a longtime.

 

[audreyh1]

Yes, I understand there are many reasons to wait. I'm just suggesting that waiting for higher interest rates may not work out to be a good strategy. And, actually, IMO long-term rates could still go down more even though it seems incredible. The paper shows why it's possible.

Regardless of what happens with interest rates, there are lots of other good reasons to wait to buy an SPIA, as I plan to do.

 

[FIREd]

Is it possible to find COLA'd deferred payout annuities at this point?

 

[brewer12345]

Is it possible to find COLA'd deferred payout annuities at this point?

No idea. Theoretically, it shouldn't be terribly hard for the insurers to design such a product.

 

[obgyn65]

It is a deferred annuity, not an immediate annuity. The rate is 11.88% payout at age 62. In makes sense in my case as I have worked only 10 years in the USA (have not gotten my 40 quarters yet). No heir. Small pension. There is no extra payout.

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?