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Old 10-11-2011, 02:35 PM   #61
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BTW, it's simple to calculate the return on any fixed-payment, life guaranteed SPIA just by using the XRR function on Excel. No charts needed...
At this point, I'm not interested in non-inflation adjusted annuities since they leave too much risk on the table for my taste.
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Old 10-11-2011, 02:52 PM   #62
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Well, that settles that. i am glad that most American companies offer their goods and services as a gift to mankind.

Whew! I'm glad you warned me, I'll stay away from those capitalist annuity hawkers.

Ha
I am known to overstate the obvious........
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Old 10-11-2011, 02:55 PM   #63
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At this point, I'm not interested in non-inflation adjusted annuities since they leave too much risk on the table for my taste.
You DO KNOW that "inflation-adjusted" annuities are actuarily-based, right? The payments are below those of non-cola annuities, but yes, you get a "bump" every year. All you have to do is live til about age 90 to "beat the system"........
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Old 10-11-2011, 03:01 PM   #64
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You DO KNOW that "inflation-adjusted" annuities are actuarily-based, right? The payments are below those of non-cola annuities, but yes, you get a "bump" every year. All you have to do is live til about age 90 to "beat the system"........
If I'm going to give up all or some of my FIRE portfolio to eliminate investment risk and longevity risk, I don't see the point of leaving inflation risk (very real to me - I lived through the 70's with the "WIN" buttons) on the table. A decade of moderate to high inflation (NOT hyper inflation, just 5% - 10%) compounded will turn that fixed annuity into pocket change pronto.

Milevsky and I are in 100% agreement on that.......... I liked that part of his article.
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Old 10-11-2011, 03:27 PM   #65
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Actually there is, sort of. In the event an insurer goes into receivership, state insurance regulators step in and take control of the insurer, and if the insurer's assets are insufficient to pay benefits, state guaranty funds would typically make up the difference.

The state guaranty funds are replenished based on future assessments made against the solvent insurers.

While I'm not a big fan of annuities for a number of reasons, the fact is that they are relatively safe given the regulation of the insurance industry and the backstop of the state guarantee funds. Perhaps a small notch below an FDIC insured CD.
I think there is a really big problem with the annuity insurance... it only covers principal. Here is an example: say you invest $100k in SPIA to get $250/month (=3%*100k/12), cola-adjusted. Presumably you choose a highly rated company and it won't fail soon, but 30 years into the future, who knows... So, after 30 years, say inflation was at 3%. Your $250 has now become $606.82/month. If the company fails, all you get back is $100k. To get $606.82/month from that $100k, you'd need to get a cola-adjusted SPIA at the time to return 7.3% (7.3%*100k/12~606.82)... (and if company fails, likely it will happen in a recession kind of environment)
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Old 10-11-2011, 04:39 PM   #66
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At this point, I'm not interested in non-inflation adjusted annuities since they leave too much risk on the table for my taste.
I have thought about annuities as a back up (to my back ups, to... blah, blah, belt, suspenders... blah, blah). It occurred to me that one might play the game of building in inflation protection by purchasing annuities at intervals instead of buying one large inflation-protected annuity. This plan would have the following (potential) benefits:

1) Higher ages at succeeding purchases would (theoretically) provide higher payouts per input.
2) Gives you some time to see if the markets turn around and (just maybe) give you a chance to decide you don't need no more stinkin' annuities.
3) Any significant inflation would (almost certainly, eventually) lead to higher interest rates which would (theoretically) lead to higher payouts per input.
4) As additional annuities were purchased, different companies could be selected to help minimize putting all eggs into one insurance company.
5) If you croak early, you haven't bet (all) the farm on annuities. Your heirs will be most appreciative.
6) You aren't paying extra fees for the inflation protection (which you JUST might NOT need if inflation chooses not to rear its ugly rear.)
7) You could play the game by ear. If inflation is tame, you can wait longer to buy the next annuity "installment". If it's higher, you could move up your purchase to "titrate" your monthly income. More options = good.


The downside to this plan would include:
1) It assumes that you have a way to preserve or preferably grow your stash while waiting to purchase subsequent annuities. If you can do this (reliably) perhaps you don't need annuities.
2) I suppose interest rates COULD go even lower - but I wouldn't think it likely or significant in magnitude if it occurred.
3) All the disadvantages of annuities in general (adequately discussed elsewhere in this and many other threads, I submit).
4) (I'm sure this group can fill out 4 through 38, heh, heh.)
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Old 10-11-2011, 08:41 PM   #67
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I think there is a really big problem with the annuity insurance... it only covers principal. Here is an example: say you invest $100k in SPIA to get $250/month (=3%*100k/12), cola-adjusted. Presumably you choose a highly rated company and it won't fail soon, but 30 years into the future, who knows... So, after 30 years, say inflation was at 3%. Your $250 has now become $606.82/month. If the company fails, all you get back is $100k. To get $606.82/month from that $100k, you'd need to get a cola-adjusted SPIA at the time to return 7.3% (7.3%*100k/12~606.82)... (and if company fails, likely it will happen in a recession kind of environment)
No, it doesn't work the way you think it does. In the event the insurer went into receivership you would get the contractual benefits ($606.82/month in your example) and it would continue to inflate each year based on the provisions in the contract. You would receive the same benefit that you would receive if the insurer was not troubled, but if the insurer's assets were insufficient to pay the contractual benefits then the state guaranty fund would pay for the difference.
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Old 10-12-2011, 12:06 PM   #68
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I have thought about annuities as a back up (to my back ups, to... blah, blah, belt, suspenders... blah, blah). It occurred to me that one might play the game of building in inflation protection by purchasing annuities at intervals instead of buying one large inflation-protected annuity. ...

Some employ a ladder when purchasing a SPIA to get average rate.

I have read about a similar approach as you suggest. USAA suggests it on their site... I do not think they sell an inflation adjusted annuity. That is probably why they suggest it.

The idea is to buy a nominal annuity for an amount that will meet the needs for for some number of years. for example, one might buy a nominal annuity for an amount that covers projected inflation for several years out. Then several years later, based on the persons "actual personal inflation needs" and life circumstances, purchase another nominal annuity to provide the pay raise. That way, one reserves the right to alter part of the decision later. Plus, if their personal inflation is different that the CPI-U.. they can adjust.

That is one of the options I am considering for an inflation adjustment to our nominal guaranteed income sources.

I have a nominal pension already and intend to make an initial SPIA purchase (ladder the purchase). We will take SSx2 at 62/70. Theses income sources are staggered. As they become available they reduce our WR amount from the portfolio. But eventually, inflation will reduce the spending power of the nominal sources of income.

I will use our portfolio to cover inflation needs (the potential annuity purchase in the future). I will use bonds to hold the inflation reserve. That money might be a mutual fund. But I am considering building a treasury ladder aad maybe some tips with [part] of the portfolio's fixed allocation. Of I do, I will set the maturity date so the funds are available at some projected time in the future.

Of course, with all of the Feds activity.... I am going to hold off for a bit on the SPIA purchase. I can afford to wait and see what happens.

There is more to my plan in terms of portfolio management just in case something happens to me and DW has to try to deal with it...
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Old 10-12-2011, 12:39 PM   #69
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No, it doesn't work the way you think it does. In the event the insurer went into receivership you would get the contractual benefits ($606.82/month in your example) and it would continue to inflate each year based on the provisions in the contract. You would receive the same benefit that you would receive if the insurer was not troubled, but if the insurer's assets were insufficient to pay the contractual benefits then the state guaranty fund would pay for the difference.
Thanks. Do you have any links confirming this by any chance?

From what I was finding on the state-run websites, they talk about coverage up to some max (e.g. 300k) in terms of "present value" at the time of the failure. So, in my example, I assumed present value would not be $300k, but much more (given the $606.82 inflation protected monthly payment). And so if they determine my max is $300k, they would either return $300k or start payments based on $300k investment at the time of failure, i.e. max covered present value (which would effectively reset monthly payments back to $250, assuming the same rates at the time)...
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Old 10-12-2011, 01:54 PM   #70
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Thanks. Do you have any links confirming this by any chance?

From what I was finding on the state-run websites, they talk about coverage up to some max (e.g. 300k) in terms of "present value" at the time of the failure. So, in my example, I assumed present value would not be $300k, but much more (given the $606.82 inflation protected monthly payment). And so if they determine my max is $300k, they would either return $300k or start payments based on $300k investment at the time of failure, i.e. max covered present value (which would effectively reset monthly payments back to $250, assuming the same rates at the time)...

How COLA pensions or variable annuities are treated by state guaranty associations is a mystery to me. It was one of the questions I had when I spent several weeks and made literally a dozen phone calls and emails to Hawaii association and got no response. I eventually talked to a lawyer that worked for the insurance commissioner, but he wasn't an expert. I'd be interested in seeing a link also.
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Old 10-12-2011, 02:28 PM   #71
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How COLA pensions or variable annuities are treated by state guaranty associations is a mystery to me. It was one of the questions I had when I spent several weeks and made literally a dozen phone calls and emails to Hawaii association and got no response. I eventually talked to a lawyer that worked for the insurance commissioner, but he wasn't an expert. I'd be interested in seeing a link also.
I think its a gray area. In Wisconsin, the limit is $300K, and that only covers the contracts in the event of insolvency. In most cases, another insurer would step up and take over the book of business. Maybe I can dig a little more. More likely, it would act kind of like PBGC, where the govt covers the annuity streams, but at a max of 60% or so. If I find anything out I will report back.
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Old 10-14-2011, 05:05 AM   #72
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I have thought about annuities as a back up (to my back ups, to... blah, blah, belt, suspenders... blah, blah). It occurred to me that one might play the game of building in inflation protection by purchasing annuities at intervals instead of buying one large inflation-protected annuity. This plan would have the following (potential) benefits:

...
Here is that USAA link.

https://www.usaa.com/inet/pages/annu...cost_of_living
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