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Old 02-27-2015, 09:33 AM   #61
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I have no interest in deferred annuities/longevity insurance, but if I did I think I'd consider buying a SPIA and saving the monthly income payments in the event I lived a long time.
I just used 20% of my portfolio to buy into my ex employers DB plan which is essentially an annuity. The plan is better that the ones available commercially and I like the fact that I'm buying in at a market peak and that it fits in nicely with Wade Pfaus analysis on using SPIAs instead of bonds in a retirement portfolio. I'm now on a reverse glide path with 80% of my remaining portfolio in equities.
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Old 02-27-2015, 10:13 AM   #62
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The 3.6% pops out of an annuity calculator if you assume a 19 year lifespan past 65.

An SPIA is not longevity insurance as it lacks the deferral component.
that's now how you calculate the PV of an annuity - people don't die at their life expectancy, a little piece of you dies every day
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Old 02-27-2015, 04:48 PM   #63
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that's now how you calculate the PV of an annuity - people don't die at their life expectancy, a little piece of you dies every day
If we knew when we'd die this would all be a lot easier, but we don't, and it would be awful if we did. We make assumptions about life expectancy all the time in retirement planning so I just cranked out the number for the average annuity holder obviously it will only apply for a fraction of the population.

There's no hard and fast rule for buying an SPIA or longevity insurance other than make sure you get value for money. For example I was just offered a lump sum buyout from one ex-employer's pension plan and the chance to buy 10 years of contributions in another ex-employers DB plan. The first was a good lump sum offer given today's low IRS segmented rates. The second was a chance to buy into a COLA'ed pension and get a 7% pay out rate at age 55. I bought one and sold the other.
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Old 02-27-2015, 10:54 PM   #64
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I had an idea. Let's say that you wanted a COLAed pension. You could buy a SPIA and then a series of these deferred annuities aka longevity insurance to bump up your benefits for inflation every 5 years.

I took payout rates on a single life of an age 60 male from immediateannuities.com and constructed the following based on a $1,000/month initial benefit.

Inflation3%   
AgeTotal monthly benefitContract monthly benefitPayout ratePremium
60 1,000.00 1,000.00 5.84% 205,479.45
65 1,159.27 159.27 8.09% 23,625.33
70 1,343.92 184.64 11.45% 19,351.16
75 1,557.97 214.05 16.84% 15,253.04
80 1,806.11 248.14 26.68% 11,160.89
85 2,093.78 287.67 47.89% 7,208.19
     282,078.06

I guess that I was surprised that the premium was only 37% higher than the non-COLA benefit premium.

I don't have any particular interest in doing anything like this but was curious what the cost might be.
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Old 02-27-2015, 11:11 PM   #65
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I had an idea. Let's say that you wanted a COLAed pension. You could buy a SPIA and then a series of these deferred annuities aka longevity insurance to bump up your benefits for inflation every 5 years.

I took payout rates on a single life of an age 60 male from immediateannuities.com and constructed the following based on a $1,000/month initial benefit.

Inflation3%   
AgeTotal monthly benefitContract monthly benefitPayout ratePremium
60 1,000.00 1,000.00 5.84% 205,479.45
65 1,159.27 159.27 8.09% 23,625.33
70 1,343.92 184.64 11.45% 19,351.16
75 1,557.97 214.05 16.84% 15,253.04
80 1,806.11 248.14 26.68% 11,160.89
85 2,093.78 287.67 47.89% 7,208.19
     282,078.06

I guess that I was surprised that the premium was only 37% higher than the non-COLA benefit premium.

I don't have any particular interest in doing anything like this but was curious what the cost might be.
Interesting. I wonder how it would compare with a true COLA annuity. Your numbers make me feel good about my recent DB purchase, but I knew it was a good deal or I wouldn't have taken it...........$263k at age 54 to buy a COLA single life benefit of $1650/month starting at age 55 vs your constructed COLA annuity that costs $282k at 60 and starts at $1000/month.
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Old 02-28-2015, 09:16 AM   #66
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Originally Posted by pb4uski View Post
I had an idea. Let's say that you wanted a COLAed pension. You could buy a SPIA and then a series of these deferred annuities aka longevity insurance to bump up your benefits for inflation every 5 years.

I took payout rates on a single life of an age 60 male from immediateannuities.com and constructed the following based on a $1,000/month initial benefit.

Inflation3%   
AgeTotal monthly benefitContract monthly benefitPayout ratePremium
60 1,000.00 1,000.00 5.84% 205,479.45
65 1,159.27 159.27 8.09% 23,625.33
70 1,343.92 184.64 11.45% 19,351.16
75 1,557.97 214.05 16.84% 15,253.04
80 1,806.11 248.14 26.68% 11,160.89
85 2,093.78 287.67 47.89% 7,208.19
     282,078.06

I guess that I was surprised that the premium was only 37% higher than the non-COLA benefit premium.

I don't have any particular interest in doing anything like this but was curious what the cost might be.
I used incomesolutions that I access through Vanguard.
They had one company (Principal) that has a "COLA" annuity.

Principal's premiums for an initial $1,000 per month:
$208,333 - No changes
$298,525 - Scheduled 3% increases
$300,589 - CPI-U increases
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Old 02-28-2015, 09:42 AM   #67
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that's now how you calculate the PV of an annuity - people don't die at their life expectancy, a little piece of you dies every day
You're thinking about how an insurance company calculates the PV of an annuity. They assume they issue identical policies to thousands of people on the same day, then they assume their total payouts will decrease a little each year as people die.

But, I don't have a reason to do that type of calculation. In terms of my annuity benefits, I'm either 100% alive or 100% dead, there is no middle ground.

I determine the "value of an annuity to me" by asking whether I can meet my financial goals better with a lump sum of invested assets or with a scheduled lifetime income stream.
I've got a bunch of unknowns - future inflation, future investment returns, my date of death, extraordinary end-of-life expenses, ...
I also have various priorities. How willing am I to reduce expenses if things go poorly? How much do I want to leave to my heirs? How much flexibility do I have in that estate? How much cushion do I want? What probabilities seem acceptable?

I need to mash all that together to make a decision.
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Old 02-28-2015, 10:08 AM   #68
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Originally Posted by Independent View Post
I used incomesolutions that I access through Vanguard.
They had one company (Principal) that has a "COLA" annuity.

Principal's premiums for an initial $1,000 per month:
$208,333 - No changes
$298,525 - Scheduled 3% increases
$300,589 - CPI-U increases
The difference between $282k for quinquenial increases equal to 3% compounded and $298k for 3% annual increases seems sensible. I didn't know Principal offered a COLI... good to know.
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Old 02-28-2015, 10:12 AM   #69
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....I need to mash all that together to make a decision.
I think a sensible approach would be to calculate expected cash flows (contractual annuity benefit * probability that you will be living) and then calculate an IRR that equates that expected cash flow to the upfront premium.
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Old 02-28-2015, 11:06 AM   #70
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I determine the "value of an annuity to me" by asking whether I can meet my financial goals better with a lump sum of invested assets or with a scheduled lifetime income stream.
I've got a bunch of unknowns - future inflation, future investment returns, my date of death, extraordinary end-of-life expenses, ...
I also have various priorities. How willing am I to reduce expenses if things go poorly? How much do I want to leave to my heirs? How much flexibility do I have in that estate? How much cushion do I want? What probabilities seem acceptable?

I need to mash all that together to make a decision.
The bad thing about annuities is they way they are sold. Sales people prey on retirees' desire for guaranteed income because they remember all the times they lost money in the market and they they come along with the "8% variable/hydrid annuity" and the retiree gets scr@wed. Using an SPIA to fund part of retirement might be a good move, but you have to be incredibly sophisticated to do the same with a VA.
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Old 02-28-2015, 05:40 PM   #71
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I think a sensible approach would be to calculate expected cash flows (contractual annuity benefit * probability that you will be living) and then calculate an IRR that equates that expected cash flow to the upfront premium.
For the retiree that lives for the moment the only important annuity parameter is the pay out rate. Who cares about whether I'll live long enough to get the money back, heirs schmeirs....and, sure, survivor's benefits are nice...but what do I care, I'll be dead.....give me another gin and tonic. For the 60 year old both of the COLA example pensions have initial payout rates of about 4%, so if you value guaranteed income over leaving money to your heirs, why not use the annuity? It's as good as you'd anticipate with a balanced asset allocation. When I think of it like that a COLA'ed 7% payout rate starting a 55 is a no brainer.
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Old 03-01-2015, 08:26 PM   #72
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SPIA's and other longevity annuities? You get higher income now, but it comes at a price: Very low return on investment and less income very late in life (if you live that long). Heirs will almost certainly get shafted to one degree or another too.
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Old 03-01-2015, 08:36 PM   #73
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SPIA's and other longevity annuities? You get higher income now, but it comes at a price: Very low return on investment and less income very late in life (if you live that long). Heirs will almost certainly get shafted to one degree or another too.
A single premium deferred annuity is more appropriate for pure longevity insurance. You put down a comparatively small sum to ensure an income later in life. A lifetime SPIA will give you some longevity insurance, but without a COLA, inflation will eat into the income. The SPIA is more about current income. But with payout rates in the range of 5.5% for a single male 55 years old without a COLA I find them hard to justify on a financial level. However, if you are risk averse they might be in the mix.
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Old 03-02-2015, 09:16 AM   #74
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I think a sensible approach would be to calculate expected cash flows (contractual annuity benefit * probability that you will be living) and then calculate an IRR that equates that expected cash flow to the upfront premium.
that's essentially how I do it
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Old 03-02-2015, 09:17 AM   #75
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You're thinking about how an insurance company calculates the PV of an annuity.
no, I'm thinking about anyone that's ever taken a class in life contingencies and/or interest theory calculates the PV of an annuity
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Old 03-02-2015, 03:48 PM   #76
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I think a sensible approach would be to calculate expected cash flows (contractual annuity benefit * probability that you will be living) and then calculate an IRR that equates that expected cash flow to the upfront premium.
That makes sense for an insurance company. They really pay out just 50% of the scheduled benefits in the year that exactly 50% of the original buyers are alive.

I know how to do that math, but I'm not sure what the answer does for me, (other than to give a very rough estimate of whether the insurance company seems to be investing about like I'd invest).
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Old 03-02-2015, 03:50 PM   #77
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no, I'm thinking about anyone that's ever taken a class in life contingencies and/or interest theory calculates the PV of an annuity
I understand that. I'm saying that the PV of the annuity isn't a particularly interesting number in my planning.
I can do a similar calculation for a term life insurance policy, but the result doesn't tell me if I should buy the policy.
Being able to do a calculation doesn't make the result useful.
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Old 03-02-2015, 03:52 PM   #78
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Being able to do a calculation doesn't make the result useful.
sure it does - you can tell if you're getting ripped off or not
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Old 03-02-2015, 03:55 PM   #79
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sure it does - you can tell if you're getting ripped off or not
What does "ripped off" mean?

When I buy insurance, I expect that my premium is higher than the PV of the expected benefits (at least if I use the same interest rate they are assuming in their pricing). Insurance companies have expenses and profit goals that have to be included in premiums.

But, I still buy insurance.
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Old 03-02-2015, 03:59 PM   #80
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ripped off means that the price of the policy is based on something much lower than prevailing interest rates and/or outdated mortality
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