Longevity Insurance???

[Independent]

That's not a valid assumption if you are speaking about an SPIA (the only annuity I would recommend, under the proper situation - and yes, I/we have one).

Not to start a discussion/argument, but I see that phrase tossed about like it is fact for all situations. It's not...

Yes, I know that and you know that.

But, many people will object to SPIAs because that's what they believe.

The format that I'm suggesting (and that Sam was suggesting) is transparent enought that potential buyers can see that the money lost by the earlier-to-die is distributed directly to the survivors. I thought that would get past one objection.

 

[Independent]

That's sounds like a product that would be very useful to a lot of folks. I'm not clear on how the choice of investments within the family of funds works. Does:
A) Each investor make individual choices on the allocation of the funds in his account or
B) Vanguard makes the allocation decisions (like a target retirement fund)

If A) then I could see some marginal gaming of the system for those in ill-health who might select the most highly volatile investment choices available in hopes of a short-term higher balance even at the risk of longer-term decreases in their fund size (since these folks won't care about long-term issues).

One advantage over my "payoff at 85" approach is that the expected growth in monthly checks could start earlier and smoothly increase over time. Also, since investments aren't restricted to stripped TIPS, the expected return to participants is higher--but they are exposed to more investment risk. And if the "Option A" (above) is how it works, each participant's returns would be affected by the investment choices of all the other participants (i.e. I get less benefit from the transferred account balances of those who predecease me if those people invested stupidly and lost most of their money).

Make it "Option B", make the investment options very conservative (i.e. almost exclusively ST govt bonds) and have it run by a MF company of solid repute and I'd be very interested in buying that product as longevity insurance. The transparency you cite, as well as lower costs and the safety of being backed by the underlying assets rather than a single company would make it a far more attractive option than any annuity.

I was thinking of your Option A. The reason is that I figured most people want to maintain some control of the allocation decisions. The loss of that control is one of the objections to SPIAs. Another objection is that you're stuck with bond returns (since the insurance company invests the premiums in bonds), so this gives the opportunity for better returns.

But, I'll agree that Option A make the longevity bonus portion of my return susceptible to the choices of the other people in the pool - whether good or bad. That's a negative. I'd probably keep multiple fund, but make sure none of them are in the high volatility end of the spectrum.

Note that I'm not particularly at risk from the early loss issues that retirees normally worry about. Since most of my longevity bonuses will come later in life, it seems that if other people are "too" far into equities, I don't share much of that until time has had a chance to even out the returns.

But your concept of a single choice, or a mix determined by the sponsor, certainly fits within the concept.

 

[samclem]

I was thinking of your Option A. The reason is that I figured most people want to maintain some control of the allocation decisions.

Thanks for the clarification. I think your idea (either "Option A" or "Option B") offers the potential for higher growth rates and better payouts, and smoothly increasing lifetime income. The idea I put forward offers the advantages of relative simplicity (one "cohort" of owners in each pool, a single payout date) and probably lower "overhead" costs (since the life/death status of participants would just have to be verified one time rather than continuously).
Either would be a good way to insure against longevity risk, allowing the rest of a person's nest egg to be spent down to a predetermined (near) zero balance. That frees up a lot of money for use during the earlier, healthier years of retirement. I just don't have enough faith in the present annuity products to allow them to do this function for me.

Okay, let's go into bidness!

 

[Independent]

Okay, let's go into bidness!

Wish I could, for curiosity's sake if nothing else. But, I'm pretty sure the thing needs to be sponsored by a big, well-known, low cost mutual fund sponsor to give it credibility. Only one name comes to mind.

Maybe some day I'll at least start a poll here, just for fun.

 

[nun]

I was thinking of your Option A. The reason is that I figured most people want to maintain some control of the allocation decisions. The loss of that control is one of the objections to SPIAs. Another objection is that you're stuck with bond returns (since the insurance company invests the premiums in bonds), so this gives the opportunity for better returns.
.

For people who are already making AA decisions with their money the guarantee and lack of decision making in SPIAs can be attractive.

No body's mentioned owning your home and reverse mortgages as longevity insurance yet.

 

[BobbinChina]

The RMD regulations

Well, I finally got around to doing some serious research relative to seeking out companies that offer longevity annuities and to tracking the state of that government regulation regarding QLAC (the qualified annuity that can reduce your IRA balance for RMD purposes).

Unfortunately, the proposed regs that were published in Feb. 2012 have yet to be finalized! So it's too soon to buy this product if you want the RMD part of it. I actually talked to the attorney who drafted the proposed regs and she said it's being finalized now but can't say when it will be done.

After reading the comments that the regs received, I feel good about the prospects of having final regs but when is another matter. I'm guessing maybe by year end but no one has said that. So that gives me more time I suppose to narrow down which company I'll buy from.

Just figured I should post this since my previous posts had pretty much assumed it was all a go at this point. Sorry bout that

 

[kramer]

I am not an expert in annuities so take this for what it is worth.

Supposedly, the best time to buy an annuity is approximately in your mid-70s when mortality credits are high. As we get older, the ratio of our average remaining life expectancy divided by the variance in our remaining life expectancy gets lower -- leading to more mortality credits. So the insurance benefit has more value to the purchaser later in life. At the same time, you don't want to buy so late in life that you have delayed a reliable income stream too long to be useful. So this tradeoff is where the mid-70s age of purchase comes in (supposedly).

So is one idea to simply buy a TIPs bond (or set of them), which will mature in approximately this time period of your life, maybe over a series of a few years? You will have a guaranteed real principal value at TIPs bond maturity and then can purchase the Immediate Annuity with that money (assuming you are in good enough health for this to make sense).

This helps reduce the credit risk with insurance companies since your money is invested with them for less time. Also, you have a better idea of how your assets have performed at the point of annuitization and so can make a better decision about how much to annuitize. Same goes for better knowledge of tax policy at the point of annuitization instead of trying to predict this a decade or two in advance.

 

[obgyn65]

A new point is made about "adjustments" to deferred annuities, in the WSJ :

"Moreover, given today's ultralow interest rates, the payouts on these annuities are near multiyear lows. If inflation heats up, their purchasing power will be reduced.
As a result, some insurers allow policyholders willing to accept a lower initial income to raise annual payments. MassMutual, for example, permits adjustments of 1% to 4% each year. On Oct. 1, Northwestern unveiled its Select Portfolio Deferred Income Annuity, which gives policyholders a raise if the company issues an annual dividend."

Postpone Annuity Payments for Years - WSJ.com

 

[Independent]

I am not an expert in annuities so take this for what it is worth.

Supposedly, the best time to buy an annuity is approximately in your mid-70s when mortality credits are high. As we get older, the ratio of our average remaining life expectancy divided by the variance in our remaining life expectancy gets lower -- leading to more mortality credits. So the insurance benefit has more value to the purchaser later in life. At the same time, you don't want to buy so late in life that you have delayed a reliable income stream too long to be useful. So this tradeoff is where the mid-70s age of purchase comes in (supposedly).

So is one idea to simply buy a TIPs bond (or set of them), which will mature in approximately this time period of your life, maybe over a series of a few years? You will have a guaranteed real principal value at TIPs bond maturity and then can purchase the Immediate Annuity with that money (assuming you are in good enough health for this to make sense).

This helps reduce the credit risk with insurance companies since your money is invested with them for less time. Also, you have a better idea of how your assets have performed at the point of annuitization and so can make a better decision about how much to annuitize. Same goes for better knowledge of tax policy at the point of annuitization instead of trying to predict this a decade or two in advance.

I'd say that the "mortality credit" is simply the distribution of the funds held for the people who died each year. I don't know how the variance of the life expectancy enters into that distribution. It does impact, theoretically at least, the insurer's risk.

But, I'm fine with your idea of investing in TIPS and waiting to see what happens. I could say that's what we're doing. I'm expecting that "what happens" will be that we won't need an SPIA at a higher age.

The theoretical drawback is that there are mortality credits in every year, (even if they are smaller at the lower ages) and you lose out on those that are paid during the time you own the TIPS.

We'd need to get some SPIA quotes at various ages to see if that's a big deal.

There's also the issue of when you want to lock in interest rates, which involves notions of how rates may change in the future.

 

[mathjak107]

Like I said, waaayyy oversold. It is possible (not certain, but possible) that these things are suitable for you, but for 99+% of the people they are sold to they are a bad idea.

If you have not already, take a look at merger arbitrage funds as a diversifier/modest risk option that is an alternative to bonds and equities. The two I am aware of (and invest in) are MERFX and ARBFX. They have some equity market correlation, but usually only in the short term. Mid to high single digit returns, with a controlled risk profile and a good track record.

i look at these indexed products with these floors as basically a cd on steroids , they are poor proxies for a market investment.

by the time you get the fees taken out , no dividends and your capped participation rate your return is slightly better in a good year then a cd alone.

they are merely a kicker for a cd rather then any kind of market investment in my opinion.

 

[mathjak107]

I am not an expert in annuities so take this for what it is worth.

Supposedly, the best time to buy an annuity is approximately in your mid-70s when mortality credits are high. As we get older, the ratio of our average remaining life expectancy divided by the variance in our remaining life expectancy gets lower -- leading to more mortality credits. So the insurance benefit has more value to the purchaser later in life. At the same time, you don't want to buy so late in life that you have delayed a reliable income stream too long to be useful. So this tradeoff is where the mid-70s age of purchase comes in (supposedly).

So is one idea to simply buy a TIPs bond (or set of them), which will mature in approximately this time period of your life, maybe over a series of a few years? You will have a guaranteed real principal value at TIPs bond maturity and then can purchase the Immediate Annuity with that money (assuming you are in good enough health for this to make sense).

This helps reduce the credit risk with insurance companies since your money is invested with them for less time. Also, you have a better idea of how your assets have performed at the point of annuitization and so can make a better decision about how much to annuitize. Same goes for better knowledge of tax policy at the point of annuitization instead of trying to predict this a decade or two in advance.

the only issue i see with buying tips and self insuring up to that point is you still need to have the money to do it.

the big beauty i find in longevity insurance is that someone low on savings or someone looking to increase their withdrawals can plan only to 80 or 85 which takes a lot less dough saved or commited then planning until 95 or 100.


they can then for not much money buy a policy to kick in if they happen to make it to 80 or so .

that can require less cash, and allow higher withdrawals when your younger then if you had to plan out to 95 or 100 on your own .