Poll:At what discount rate would you buy SPIA?

[Huston55]

So 4.8% based on an actuarial lifespan wasn't enough to for me to keep my small employer non-COLA'ed pension....I look the $35k lump sum and will roll it into my IRA. I still intend to buy into my other ex-employer plan that has a COLA.

Isn't this based at least in part on the fact that you have enough guaranteed, COLAd income streams at SS age to ensure essential (maybe even all) expenses, and enough guaranteed income to bridge until then? So, you're essentially in the 'safety first' camp with guaranteed income, then invest heavily in equities with the remainder, correct?

If that is correct, I think NOT locking in the $35K at 4.8% is a wise decision.

 

[nun]

Isn't this based at least in part on the fact that you have enough guaranteed, COLAd income streams at SS age to ensure essential (maybe even all) expenses, and enough guaranteed income to bridge until then? So, you're essentially in the 'safety first' camp with guaranteed income, then invest heavily in equities with the remainder, correct?

If that is correct, I think NOT locking in the $35K at 4.8% is a wise decision.

Yes, that's it exactly. The state COLAed pension plan will give me income from 55 for life (I'm 53) and cover my expenses when added to rental income, so I won't need to spend 457 or regular account money. It (and rent) will fill up the 15% tax bracket so IRA to ROTH conversions probably won't happen, but I will have reduced my tax deferred balance by $263k. I actually wouldn't be buying into the state pension if it didn't have a COLA.

 

[robertf57]

Nun,

I hope you realize that the TIAA Traditional is not a regular SPIA product. Your interest rate is probably about 6% given your vintage and your payout would be ~ 7+% . Most importantly, you payout isn't fixed. If rates increase with inflation, TIAA has increased the adjustable (variable) part of their payout and your check will increase.

TIAA Traditional is a difficult product to fairly value. It certainly is not a simple SPIA. I know I will not be taking the 9 year and a day roll out for my TIAA stash... I will annuitize at some point.

 

[nun]

Nun, I hope you realize that the TIAA Traditional is not a regular SPIA product. Your interest rate is probably about 6% given your vintage and your payout would be ~ 7+% . Most importantly, you payout isn't fixed. If rates increase with inflation, TIAA has increased the adjustable (variable) part of their payout and your check will increase. TIAA Traditional is a difficult product to fairly value. It certainly is not a simple SPIA. I know I will not be taking the 9 year and a day roll out for my TIAA stash... I will annuitize at some point.

Yes I understand TIAA-Traditional. I probably won't annuitizing it because I have so much of thrat type of income already. I might do the transfer payout or just systematic withdrawals. I've got to big vintage interest rates ticking away in it and calculated an average of 6% return over the last 27 years.

 

[Huston55]

Isn't this based at least in part on the fact that you have enough guaranteed, COLAd income streams at SS age to ensure essential (maybe even all) expenses, and enough guaranteed income to bridge until then? So, you're essentially in the 'safety first' camp with guaranteed income, then invest heavily in equities with the remainder, correct?

If that is correct, I think NOT locking in the $35K at 4.8% is a wise decision.

Here is an article by Bernstein describing the "guaranteed income stream + equity-heavy portfolio" approach and why it works.

How to Think About Risk in Retirement - WSJ

Excerpt:

The reverse-glide-path approach, then, works because it starts out with a large, ultrasafe liability-matching portfolio and a small risk portfolio. As the retiree ages, the LMP gets spent down and the RP gets larger.

There’s nothing special or new about this; it’s simply a variant of the long-established “two-bucket” approach that separates, with mental accounting, a safe portfolio dedicated to essential living expenses from a risky one aimed at one’s heirs, charities and the odd business-class seat.

 

[mathjak107]

believe it or not immediate annuities have their payouts based more on mortality credits than interest rates. it isn't the big jumps you see like with bonds.

 

[Huston55]

believe it or not immediate annuities have their payouts based more on mortality credits than interest rates. it isn't the big jumps you see like with bonds.

Is there a place I could study this? See the formulas to understand it?


Sent from my iPhone using Early Retirement Forum

 

[mathjak107]

you can monitor payouts at immediateannuities.com and see how they react with moves in interest rates.

 

[nun]

Here is an article by Bernstein describing the "guaranteed income stream + equity-heavy portfolio" approach and why it works. How to Think About Risk in Retirement - WSJ Excerpt: The reverse-glide-path approach, then, works because it starts out with a large, ultrasafe liability-matching portfolio and a small risk portfolio. As the retiree ages, the LMP gets spent down and the RP gets larger. There’s nothing special or new about this; it’s simply a variant of the long-established “two-bucket” approach that separates, with mental accounting, a safe portfolio dedicated to essential living expenses from a risky one aimed at one’s heirs, charities and the odd business-class seat.

Everything comes down to AA and risk in the end. Annuities and pensions have gone out if favour in the past 30 years because the great returns in the stock and bond markets. Also if the annuity doesn't have a COLA inflation risk is enormous and couple that with the low rates you'll get now, they don't seem very attractive. But using an SPIA as insurance against longevity or market corrections is worth considering.

 

[mathjak107]

using them for longevity insurance can be very powerful.

they are quite cheap for the amounts you get.

what could be better than planning until age 80 instead of 95 and if you live longer get a whopper of a payment kicking in to carry you through.

 

[nun]

using them for longevity insurance can be very powerful.

they are quite cheap for the amounts you get.

what could be better than planning until age 80 instead of 95 and if you live longer get a whopper of a payment kicking in to carry you through.

A deferred annuity is better to insure for longevity, one that you buy when you retire at say 60 and doesn't start paying until you are 80. Inflation will have greatly eroded the value of an SPIA by the time you get to 80.......of course if the current income allows you to grow your portfolio over those 20 years......predicting the future is hard. Many people will be ok with SS as their COLAed annuity some will want more guaranteed income.

 

[CoolChange]

I like the idea of a deferred annuity as longevity insurance; but, I also fear that it is only a false sense of security: What seems like a huge payment today may not actually be worth much when I am 80.

We had a fairly active thread here a while back on this subject; at that time, no one had found a product that actually served the longevity insurance purpose if I recall correctly. But, I would be very happy if someone could prove me wrong on this since it could reduce much uncertainty in my planning.

 

[nun]

I like the idea of a deferred annuity as longevity insurance; but, I also fear that it is only a false sense of security: What seems like a huge payment today may not actually be worth much when I am 80.

We had a fairly active thread here a while back on this subject; at that time, no one had found a product that actually served the longevity insurance purpose if I recall correctly. But, I would be very happy if someone could prove me wrong on this since it could reduce much uncertainty in my planning.

Actually TIAA-Traditional is a pretty good deferred annuity product, but it's only available through certain retirement accounts. Back in 1987 I started putting money into it and when I left that employer in 1991 it had a $10k balance. It's grown to $48k today and I can annuituize it anytime after 55

 

[mathjak107]

I like the idea of a deferred annuity as longevity insurance; but, I also fear that it is only a false sense of security: What seems like a huge payment today may not actually be worth much when I am 80.

We had a fairly active thread here a while back on this subject; at that time, no one had found a product that actually served the longevity insurance purpose if I recall correctly. But, I would be very happy if someone could prove me wrong on this since it could reduce much uncertainty in my planning.

studies show inflation is not much of an issue by our 80's. we have cut out doing and buying so much we used to that the elimination of the things we save on tends to cover any inflation in what we still use.

 

[nun]

I like the idea of a deferred annuity as longevity insurance; but, I also fear that it is only a false sense of security: What seems like a huge payment today may not actually be worth much when I am 80.

We had a fairly active thread here a while back on this subject; at that time, no one had found a product that actually served the longevity insurance purpose if I recall correctly. But, I would be very happy if someone could prove me wrong on this since it could reduce much uncertainty in my planning.

Well that's the old story of buying enough insurance. Figuring out how much income you'll want at age 80 is probably the most difficult bit .

 

[CoolChange]

Actually TIAA-Traditional is a pretty good deferred annuity product, but it's only available through certain retirement accounts. Back in 1987 I started putting money into it and when I left that employer in 1991 it had a $10k balance. It's grown to $48k today and I can annuituize it anytime after 55

Good point. What I should have said was that I was not aware of any generally available product that I would consider good longevity insurance. Some of the TIAA products, especial the older ones, would indeed fit the bill; but, I have never had access to those, at least since I started looking for such things.

studies show inflation is not much of an issue by our 80's. we have cut out doing and buying so much we used to that the elimination of the things we save on tends to cover any inflation in what we still use.

Well that's the old story of buying enough insurance. Figuring out how much income you'll want at age 80 is probably the most difficult bit .

I am actually not terribly concerned with the inflation after 80; it is 30+ years between now and 80 that are my issue making the calculation of nominal income that I will want at 80 by far the most difficult bit.

 

[Huston55]

Isn't this based at least in part on the fact that you have enough guaranteed, COLAd income streams at SS age to ensure essential (maybe even all) expenses, and enough guaranteed income to bridge until then? So, you're essentially in the 'safety first' camp with guaranteed income, then invest heavily in equities with the remainder, correct?

If that is correct, I think NOT locking in the $35K at 4.8% is a wise decision.

Yes, that's it exactly. The state COLAed pension plan will give me income from 55 for life (I'm 53) and cover my expenses when added to rental income, so I won't need to spend 457 or regular account money. It (and rent) will fill up the 15% tax bracket so IRA to ROTH conversions probably won't happen, but I will have reduced my tax deferred balance by $263k. I actually wouldn't be buying into the state pension if it didn't have a COLA.

This Pfau follow-up to Bernstein's WSJ article is more food for thought regarding 'safety first' and 'probability based' approaches.

Wade Pfau's Retirement Researcher Blog: Rising Glidepaths and Liability-Matching Portfolios

Again, I think a very important bit of context for answering the OP question is the retiree's total PF situation (including income streams). That seems to guide the answer to the "what discount rate" question, as well as the "would I even buy an annuity" question. We've seen that variation in responses to this thread.

I also find it interesting that Bernstein, Pfau, Kitces, Frank & Tomlinson all seem, to some extent, to agree that the 'safety first' vs 'probability based' is 'to-may-toh' vs 'to-mah-toh.' I suppose I see the overlap in the methodologies but, I'm not sure it's as slight as 'to-may-toh' / 'to-mah-toh' for me.

 

[MooreBonds]

I also find it interesting that Bernstein, Pfau, Kitces, Frank & Tomlinson all seem, to some extent, to agree that the 'safety first' vs 'probability based' is 'to-may-toh' vs 'to-mah-toh.' I suppose I see the overlap in the methodologies but, I'm not sure it's as slight as 'to-may-toh' / 'to-mah-toh' for me.

I think their 'to-may-toh' vs 'to-mah-toh' conclusion is largely based on the realization that if people are that intelligent and versed in matters of investments and personal finance, they realize most of the risks of each fork in the road they take in their 50s/60s/70s regarding the 'safety first' vs 'probability based', and where those forks could lead them in their 70s and 80s. With either decision they make, they will most likely be able to adapt either way, and PROBABLY not have too much difference in their fiscal health (barring any 'stupid' investments along the way or black swans landing in their front yard).

Their overall message is that either course of action should end up with you enjoying a fairly comfortable retirement. It provides a bigger picture idea of what the average person needs to do to achieve a comfortable lifestyle of an $X/year budget - how they choose to fine-tune it and take an inflation risk vs more market risk is up to their final selection.

Similar to a car buyer comparing a BMW to an Audi**, where both are fine cars that will last a while and give you a solid driving experience, and it's more of deciding whether you want the run-flat tires (more annuity income for safety) or spend the money on the leather trim package and premium sound system ('probability' of portfolio market returns)...rather than having to choose a specific car where one will last just 2 years then blow up, versus the other lasting 20 years.

**Yes, I know there are passionate BMW enthusiasts on the board. I'm not a car guy. Just picked two random brands.

 

[nun]

Well I sent the paperwork back to the state today to buy into the DB plan. The final numbers are

Cost to buy in: $263k
Starts at age 55....that's in 18 months time
Initial payout rate: 7.0%
Annual pay out: $19.8k
COLA is 3% on first $13.2k
Interest rate if I live to 84: 7.6%
When I die my beneficiary gets any remaining pension account balance, I'm taking a 1% lower pension to get this benefit.

Spending about 20% of my retirement savings to buy an annuity took a lot of thinking, but the numbers are too good to pass up.....assuming they stay that way.

One advantage of this is that I get a guaranteed income stating at 55 and reduce my 401a/IRA etc balance by $263k which will be good when RMDs come into the picture.