New Wrinkle on Annuities

[FIRE'd@51]

The problem is that there are insufficient investments that they could invest in that would also provide an inflation adjusted cash flow stream to match the inflation adjusted annuity obligation.

How hard would it be for an insurance company to buy 30-year TIPS and sell short 20-year TIPS (or some appropriate combination) to create the cash flows to hedge the payments from age 85 to the expected actuarial death age for a pool of current 65 year-olds?

 

[haha]

How hard would it be for an insurance company to buy 30-year TIPS and sell short 20-year TIPS (or some appropriate combination) to create the cash flows to hedge the payments from age 85 to the expected actuarial death age for a pool of current 65 year-olds?

Re-investment risk. Unless they can get hold of TIPS strips of the appropriate maturities, and I do not know if these even exist. (ie, if someone is stripping the TIPS coupons and making a market in them.)

Ha

 

[Texas Proud]

Tax payments perhaps? If you are running out of money in very old age, being able to get that IRA money without owing tax could matter a lot, as opposed to taking it starting at age 70 when you still may have relatively high taxable income.

Ha

I am sure there are people who fit the bill you describe, but probably very few... if you are taking money out when you are 70 and paying high taxes and reinvesting the remainder, then how are you without money later in life What happened? IOW, the withdrawal rate at 70 is not that big... and if you are in a high tax bracket then you are making a lot of money... so something came along to have you go 'broke' and need money when you are in your late 80s... changing the RMD for everybody for this small number (and probably very small) is not something I would propose...

Unless I missed the point of this post, the break on the RMD revision is that it is TAX FREE if you use it to buy a longevity annuity.

Editing because I posted beforeI saw haha's reply.

I was not responding to the original post that talked about the tax free use of the money... I was responding to the proposal to change RMD rules earlier in life for whatever reason.... I think that proposal is not good for the problem presented....

If I responded to the OP, then I would probably disagree with the tax free part of it... the probability of the person paying taxes if they are so poor is low... but I am not strongly opposed to this... as I think that few people would do it and the amount of tax money that would not be collected has to be very small...

 

[pb4uski]

How hard would it be for an insurance company to buy 30-year TIPS and sell short 20-year TIPS (or some appropriate combination) to create the cash flows to hedge the payments from age 85 to the expected actuarial death age for a pool of current 65 year-olds?

IMO it would border on impossible. If they have a 2 billion liability where will they borrow the 2 billion of 20 year TIPS to sell short (for 20 years) and at what cost?

If it was as easy as you think we would see a plethora of inflation adjusted annuities available.

 

[FIRE'd@51]

IMO it would border on impossible. If they have a 2 billion liability where will they borrow the 2 billion of 20 year TIPS to sell short (for 20 years) and at what cost?

If it was as easy as you think we would see a plethora of inflation adjusted annuities available.

I'm not so sure.

You have to look at the insurance company's total book of business. We know Vanguard (and others) sell inflation-adjusted immediate annuities. So by using the coupons for the first 20 years to offset the cash flows for a book of inflation-adjusted SPIA's, the seller of the longevity option probably wouldn't actually have to sell short 20-year TIPS in any great size, if at all.

 

[brewer12345]

+1


Why couldn't the insurance companies price a COLA'd product off the forward inflation rates embedded in the TIPS markets?

Dunno. Perhaps the tips market is not that liquid in the out years? We are talking about very, very long duration products (30 or 40 year zeros).

 

[rescueme]

Pretty strong opinion, and I disagree with it. When you buy the annuity, it's no longer "your money."

Strong opinion? Sure. I read many posts on this and other forums that state that once you give any (annuity) insurance company your premium, there is no way to recover a portion of that premium due to early death. That's just incorrect, assuming you take the insurance on the possibility of an early death. Have you ever played blackjack and buy insurance if the dealer draws an ace?

As far as saying it's the insurance company's money? Think of insuring your car. If you cancel the policy mid-way through the year, you will receive a refund on your premium. Of course, you don't have to pay extra for this possibility although the amount of refund may be less than you anticipate. With this option on an (SPIA) annuity, you know exactly what you (your estate) will receive.

All you're doing with an annuity (with the option) is the same thing and doesn’t impact your return to any great degree (in our case, only a few basis points). You can compute your own IRR's depending on guaranteed length of policy with/without this option and make a decision if it makes sense in your specific case. Oh BTW, if you exceed your expected term (lifespan) your actual realized overall IRR will be greater. Granted, not many folks make out on this one since lifespan are computed pretty well by insurance companies.

If you decide that an annuity (SPIA) is not for you, in your situation? Fine. I don't care what you do; everybody must analyze their specification situation, sources of income and personal prejudices (as some folk’s do, which would never be in the equity market). Just don't discount it as an option on the basis of talk about "loss of money if you die early" (especially the day after you pay your premium). I'm just adding some more facts since DW/me are one of the folks that actually have an SPIA rather than just talk about it.

 

[Texas Proud]

Strong opinion? Sure. I read many posts on this and other forums that state that once you give any (annuity) insurance company your premium, there is no way to recover a portion of that premium due to early death. That's just incorrect, assuming you take the insurance on the possibility of an early death. Have you ever played blackjack and buy insurance if the dealer draws an ace?

As far as saying it's the insurance company's money? Think of insuring your car. If you cancel the policy mid-way through the year, you will receive a refund on your premium. Of course, you don't have to pay extra for this possibility although the amount of refund may be less than you anticipate. With this option on an (SPIA) annuity, you know exactly what you (your estate) will receive.

All you're doing with an annuity (with the option) is the same thing and doesn’t impact your return to any great degree (in our case, only a few basis points). You can compute your own IRR's depending on guaranteed length of policy with/without this option and make a decision if it makes sense in your specific case. Oh BTW, if you exceed your expected term (lifespan) your actual realized overall IRR will be greater. Granted, not many folks make out on this one since lifespan are computed pretty well by insurance companies.

If you decide that an annuity (SPIA) is not for you, in your situation? Fine. I don't care what you do; everybody must analyze their specification situation, sources of income and personal prejudices (as some folk’s do, which would never be in the equity market). Just don't discount it as an option on the basis of talk about "loss of money if you die early" (especially the day after you pay your premium). I'm just adding some more facts since DW/me are one of the folks that actually have an SPIA rather than just talk about it.

I kind of agree with samclean in that it is not your money anymore... because you do not have control of the money... simply put....

But, you are right that you can buy an annuity with minimum payout periods etc. etc... and there are some who will pay you back some amount if you die very soon after buying... that is in the contract... but the money you sent them is still not 'your' money... your money will be coming per the contract terms.... and if your annuity did not have any of the protections you talk about, your estate does not get anything if you die....

 

[Midpack]

I kind of agree with samclean in that it is not your money anymore... because you do not have control of the money... simply put....

But, you are right that you can buy an annuity with minimum payout periods etc. etc... and there are some who will pay you back some amount if you die very soon after buying... that is in the contract... but the money you sent them is still not 'your' money... your money will be coming per the contract terms.... and if your annuity did not have any of the protections you talk about, your estate does not get anything if you die....

And at a significant premium.

Online quote Immediate Annuity age 75, $4K/mo - cost $503K
Same with 20 yr minimum - cost $727K

 

[rescueme]

And at a significant premium.

Online quote Immediate Annuity age 75, $4K/mo - cost $503K
Same with 20 yr minimum - cost $727K

I would think that any company would charge quite a bit to guarantee payments until age 95 (75 + 20).

As I remember from our contract, the 28 year guarantee reduced our monthly payment around $20 (at age 59).

I'm sure the insurance company factored in the longer possible lifespan that they could invest the preimum paid. The older you are at policy start, the risk is that you are going to die in less years (of course).

Maybe another reason to consider an SPIA (if it's an option in your case) at an earlier age?

 

[73ss454]

Online quote Immediate Annuity age 75, $4K/mo - cost $503K
Same with 20 yr minimum - cost $727K

Someone teach me! Lets say I purchased the annuity described above at 75 and lived a long life to 85. Now lets say I put the 503K under my mattress and took out 4K a month. If I divide the 503K by 120 months I can take out $4191 for the full term. This is if I didn't invest it and make any % on interest. So why would I buy an annuity.

I know you guys are going to say in case I live past 85. But if I invest it at a reasonable rate it would last me past 85 and if I die earlier my family would get something. Annuities make no sense to me but I'm sure they do to insurance co's.

 

[ziggy29]

Therein lies the rub.

I have a great deal of difficulty believing the do-whatever-it-takes-to-get-reelected bunch tasked with making these decisions won't continue to take the path of least resistance and make only minor changes. Doing anything more will likely not be 'politically defensible' and won't really get serious consideration - at least not for two or three more decades when you and I are dead. (If not physically, certainly mentally... )

That's a lot of words to say "they're gonna keep kicking the can"....

 

[rescueme]

Someone teach me! Lets say I purchased the annuity described above at 75 and lived a long life to 85. Now lets say I put the 503K under my matress and took out 4K a month. If I divide the 503K by 120 months I can take out $4191 for the full term. This is if I didn't invest it and make any % on interest. So why would I buy an annuity.

In that situation (along with possibly getting the max benefit on SS along with any other pension income), it makes less sense.

Like I've stated in the past, an annuity (SPIA) may or may not make sense in your specific situation.

The scenerio you outlined is 180 degrees from the situation why we purchased ours, and by that age it's expected we don't need the security of an SPIA (although it would make it easier for us once we lose our marbles ).

In our case, at age 70 (less than six years), the SPIA payments are nothing more than icing on the cake. However, it continues to work well for the eleven years "income gap" we were/are facing, retiring earlier than planned and without the income from a pension or SS - depending only on our ability to generate sufficient guaranteed income from our retirement portfolio.

Without getting into personal numbers, let's just say that the SPIA generates a third of our required gross income while the remaining two-thirds comes from our retirement portfolio investments.

And remember, that 33% income was obtained by only "cashing in" 10% of our portfolio at the time, leaving the remaining 90% for us to "play with" and generate the needed income.

It may seem strange, but we purchased an SPIA to help fund the beginning of our retirement, not because we felt we had a risk of running out of money further on down the road. In fact, with the income (think of it as a pension), the forecasts come out that we will actually have more in the end (proven by using Fidelity's RIP program, with/without the SPIA income).

And before anybody makes a comment about not spending our last dime rather than building up an "estate"? As many on this forum know, we also need to ensure for the continuing care of our adult (disabled) son after we pass. That's why we also make most financial decisions with his future in mind.

 

[sheehs1]

Unless I missed the point of this post, the break on the RMD revision is that it is TAX FREE if you use it to buy a longevity annuity.

Editing because I posted beforeI saw haha's reply.

The article stated there is concern over people running out of money and so they are proposing to allow a percentage of a 401K to be used to buy what is basically a deferred annuity.

It might be a good idea and it might not be. Not enough detail for me to make a determination.

But...IF the purpose truly was concern over the elderly running out of money, well, then don't force the elderly to take RMD's at age 70 1/2. If we are truly living longer, the RMD age should also be allowed to increase IMHO. Every other age has increased!
In the very least, allow us to make a determination whether we actually need the RMD that year or not. To me...this would have been a logical first step rather than the annuity proposal. Unless of course, the government is actually going to guarantee those annuity companies will be around 20 years after the decision is made.

As Ha said, taxes later might be less than at 701/2 on the RMD side.

I reread the article and did not see where money placed in this annuity was tax free. How can it be tax free if it is made with before tax dollars which I'm assuming it is since it is part of a 401K.

 

[Midpack]

I would think that any company would charge quite a bit to guarantee payments until age 95 (75 + 20).

As I remember from our contract, the 28 year guarantee reduced our monthly payment around $20 (at age 59).

I'm sure the insurance company factored in the longer possible lifespan that they could invest the preimum paid. The older you are at policy start, the risk is that you are going to die in less years (of course).

Maybe another reason to consider an SPIA (if it's an option in your case) at an earlier age?

There's a premium at any age or minimum period, that was the point...

 

[sheehs1]

Someone teach me! Lets say I purchased the annuity described above at 75 and lived a long life to 85. Now lets say I put the 503K under my matress and took out 4K a month. If I divide the 503K by 120 months I can take out $4191 for the full term. This is if I didn't invest it and make any % on interest. So why would I buy an annuity.

I know you guys are going to say in case I live past 85. But if I invest it at a reasonable rate it would last me past 85 and if I die earlier my family would get something. Annuities make no sense to me but I'm sure they do to insurance co's.

This is valid. There is a "individual" asset level where a person can annuitize themselves with a percentage of their assets. I've asked this question of the last 2 people that wanted me to buy a variable annuity. It sort of stuns them. They don't know what to say. If they can pay me $4k a month with what I give them, why can't I do the same? Yes there may be some ifs, ands or buts....but unless it is has a cost of living adjustment what advantage is it?

The other thing I think I have pointed out on other posts is that a death benefit guarantee with these annuities and perhaps even the one discussed by the OP may not really be a guarantee. Had one large company run scenarios under all sorts of market conditions and my guaranteed death benefit that I was going to pay a premium for went to zero. I asked about it and he said, yes...it goes away under these market conditions. That is when I knew I really did not know "all" of what was happening inside this investment vehicle.

It is also valid that some may not want to handle the details of investing as they get older.

 

[rescueme]

...the last 2 people that wanted me to buy a variable annuity.

Run Forrest, run!

 

[JOHNNIE36]

The article stated there is concern over people running out of money and so they are proposing to allow a percentage of a 401K to be used to buy what is basically a deferred annuity.

It might be a good idea and it might not be. Not enough detail for me to make a determination.

But...IF the purpose truly was concern over the elderly running out of money, well, then don't force the elderly to take RMD's at age 70 1/2. If we are truly living longer, the RMD age should also be allowed to increase IMHO. Every other age has increased!
In the very least, allow us to make a determination whether we actually need the RMD that year or not. To me...this would have been a logical first step rather than the annuity proposal. Unless of course, the government is actually going to guarantee those annuity companies will be around 20 years after the decision is made.

As Ha said, taxes later might be less than at 701/2 on the RMD side.

I reread the article and did not see where money placed in this annuity was tax free. How can it be tax free if it is made with before tax dollars which I'm assuming it is since it is part of a 401K.

I guess that is the selling point, to use money from your IRA/401k to buy longevity insurance and to make it appealing, we will let you access that money tax free. Someplace along the line the g'mnt will want their tax money.

 

[sheehs1]

I guess that is the selling point, to use money from your IRA/401k to buy longevity insurance and to make it appealing, we will let you access that money tax free. Someplace along the line the g'mnt will want their tax money.

Actually I think they know a large percentage will not make it to 85 so what happens to that again? Don't know about you guys but when I read the obituaries many are still passing on in their late 50s, 60's and 70's. Yes some are in their 80's and even a few in their 90's but I really don't think that is a huge percentage. Or am I wrong here.

 

[REWahoo]

Actually I think they know a large percentage will not make it to 85 so what happens to that again? Don't know about you guys but when I read the obituaries many are still passing on in their late 50s, 60's and 70's. Yes some are in their 80's and even a few in their 90's but I really don't think that is a huge percentage. Or am I wrong here.

Here ya go: Social Security Actuarial Life Table

 

[sheehs1]

Thanks ReWahoo...So at age 65 males have a life expectancy of 17.19 years and females of 19.89 years. Both are shy of 85, just when those benefits kick in. Probabilities are another matter.

If I'm reading this correctly at age 65, 20% are expected to have died. At age 85, 68% and at age 87, 75%.

Well...there you go. That's why.

What did we say happened to that annuity money in this proposal? Will the owner still own it or does it go poof? Or do we even have the answer for that question yet since all the details have not been ironed out.

 

[samclem]

What did we say happened to that annuity money in this proposal? Will the owner still own it or does it go poof?

I'm sure it goes "poof". You give that money to the annuity company just like any other annuity. If you die early it's gone, unless you pay about 50% higher premiums (in which case you'd generally have been better off to have saved that premium money and keep it in your estate).

 

[pb4uski]

I wonder if it would be more cost effective to buy a SPIA + life insurance for a period of time rather than a SPIA with a minimum payment option. I think you could accomplish the same objective but with two contract rather than one.

Has anyone shopping for SPIAs done this comparison?