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View Poll Results: A what interest rate would you buy an annuity
4% 1 1.56%
5% 8 12.50%
6% 17 26.56%
7% 15 23.44%
8% and above 23 35.94%
Voters: 64. You may not vote on this poll

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Old 11-23-2014, 10:51 AM   #21
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Interest/payout rate (within what's realistically plausible) isn't a trigger for me, so I didn't vote. If we annuitize any of our nest egg, it probably won't be before we're about 80 years old and/or we find ourselves headed toward our 'annuitization hurdle.'

I've linked several times before FWIW http://www.schulmerichandassoc.com/M...cumulation.pdf. Same basic concept as Otar's green-gray-red zones.
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Old 11-23-2014, 11:05 AM   #22
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I definitely think you're on the right track using the annuity to replace fixed income. I'm fairly sure that the financial experts who advocate buying a SPIA with part of one's nest egg are thinking along the same lines. You can use the annuity to replace fixed income and keep the same stock allocations, or even increase them. The annuity gives you a lot more longevity protection than an equivalent amount of fixed income investments, so in a lot of measurable ways you are better off with the annuity, assuming a favorable interest rate and good credit quality on the part of the annuity provider.

Just be sure to avoid the high fee products like variable annuties and the rapacious salesmen that are just looking to line their own pockets at your expense.
Well the "annuity" I'm buying is the MA state pension fund. The starting payout rate is 7% which increases to 12% when I'm 80 because it has a COLA. The internal interest rate is 7.6% which blows away bond rates..... Without the COLA and if I was getting basically 30 year bond rate returns I would not consider buying an annuity.
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Old 11-23-2014, 01:19 PM   #23
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I guess by default, I'm going to be, or have been buying a SS annuity.
I plan to delay taking it until 70 for the higher income earner to max the income stream.
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Old 11-23-2014, 03:19 PM   #24
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If people are planning out to ages like 95 I'm amazed that 50% of the votes on the poll would only buy an annuity with an internal interest rate of over 8%. Is this just prejudice against annuities? The payout rate you'll get for an SPIA today starting at 55 are around 5.5% with an interest rate of maybe 3.5% for an average life span, no matter how long you live your interest rate will never be more than 5.5%.....so that's not a good deal IMHO......but if you could get an interest rate of 6% and a payout rate of maybe 8% why wouldn't a healthy person going into retirement grab it?
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Old 11-23-2014, 03:34 PM   #25
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A ways in the future for me, but if rates have returned to something like normal, I'm favorably pre-disposed to buying a dual life, inflation adjusted immediate annuity with part of my assets just to create an income floor so I never have to worry about the roof over the head or the food on the table again.

But it's all theoretical for me right now. We'll see when we get there.
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Old 11-23-2014, 09:55 PM   #26
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Originally Posted by Midpack View Post
Interest/payout rate (within what's realistically plausible) isn't a trigger for me, so I didn't vote. If we annuitize any of our nest egg, it probably won't be before we're about 80 years old and/or we find ourselves headed toward our 'annuitization hurdle.'

I've linked several times before FWIW http://www.schulmerichandassoc.com/M...cumulation.pdf. Same basic concept as Otar's green-gray-red zones.
+1

Our current plan as well.
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Old 11-24-2014, 07:42 AM   #27
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I'd vote never.....not an option on the poll. Sorry

And, the rate would change by age and many other factors......so, I guess I will find the results without value to me.....maybe others will find value.....hope so.
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Old 11-24-2014, 07:51 AM   #28
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I paid off a mortgage, which I considered like an annuity, which was at 5.5%. It added $1145 to my cash flow.

I am not sure if I would buy an actual annuity at that same rate.
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Old 11-24-2014, 07:52 AM   #29
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And, the rate would change by age and many other factors......so, I guess I will find the results without value to me.....maybe others will find value.....hope so.
But that's true for any retirement planning scenario. How long you live is a critical factor. If you are using age 95 to plan withdrawals from self invested funds why not also use it to assess an annuity? If you are in poor health or close to 95 then an annuity would not be appropriate, but at 55 or 65 if you can get an interest rate that is more than twice the yield on the current 30 year bond why wouldn't you take it and use it as the fixed income part of your AA? I can see why people might only buy an annuity with an 8% and above rate because they are looking at what bonds have returned historically, but that gives no value to the "guaranteed" nature of the annuity income.
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Old 11-24-2014, 11:36 AM   #30
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You're not going to get intelligent replies to this poll because most people don't understand present value concepts. Furthermore, your poll starts at 4% which is unrealistic in this interest rate environment. The 10-year Treasury is yielding about 2.35% and SPIA's tend to follow this rate.

In short, I'd be delighted to find a SPIA with a 3% discount rate and you haven't even included this option in your poll.
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Old 11-24-2014, 11:57 AM   #31
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You're not going to get intelligent replies to this poll because most people don't understand present value concepts. Furthermore, your poll starts at 4% which is unrealistic in this interest rate environment. The 10-year Treasury is yielding about 2.35% and SPIA's tend to follow this rate. In short, I'd be delighted to find a SPIA with a 3% discount rate and you haven't even included this option in your poll. Bruce
Maybe I'm giving the ER community too much credit, but I expect many people on here do understand the basics of annuities and present value. I didn't put interest rates below 4% because I wanted to see how much above usual rates it would get people to bite. Anyway many annuities have 5% payouts and 3% interest rates today........ Depending on your age
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Old 11-24-2014, 12:00 PM   #32
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You're not going to get intelligent replies to this poll because most people don't understand present value concepts.
I'm fairly certain that at least some of the negative responses to annuities at any realistic interest rate were from people who do, indeed, understand present value. My guess is that other factors are in play as well. One possibility is mortality risk. OP didn't say that the SPIA was for the lifetime of the participant, or maybe joint life of participant and spouse, but I bet most of the responses assumed it. Nobody wants to look like a sucker, spending hundreds of thousands on a lifetime annuity only to be hit by a bus a few months later and get only a tiny fraction of one's investment back. The high interest rates being asked for may, in part, reflect this fear of early mortality and the premium being demanded to ensure that the annuity provides a good return on investment.

I didn't make the assumption of lifetime annuity, perhaps because my own annuity is for 15 years. I or my heirs will get a 5% return on investment regardless of what happens to me over the next 15 years. In my view this is a better deal by a wide margin than other fixed income alternatives. So my answer of 5% to the poll reflects what I've actually done in real life when presented with the option.
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Old 11-24-2014, 12:06 PM   #33
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How would you feel about your 4% if we go into 14% inflation, like in the late 70's?

If it had a "never", thats what I would have voted. Now, if it had a COLA, then I would consider it.

Institutional risk, longevity risk, and inflation risk...no bias against annuitues is required!
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Old 11-24-2014, 12:21 PM   #34
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How would you feel about your 4% if we go into 14% inflation, like in the late 70's?
How would you feel about 4% for an annuity with, say, a two year term? You would be getting roughly double the interest rate available on other fixed income products with similar durations, and most likely would see a full return of investment plus interest long before your feared 14% inflation became a reality.

I'm guessing you would at least consider an annuity under those terms. So the length of the annuity should definitely be a factor in this poll.
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Old 11-24-2014, 12:50 PM   #35
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OP here. I didn't get into single vs joint vs 15 year etc because it got too complicated. I thought it best to let those vital distinctions come out in discussion...... and, look, they have. The COLA issue is key IMHO because inflation is up there with an early death (if you don't have survivor benefit) as a negative for the annuity. So here is what I'm going to do with my two employer sponsored pension plans assuming a single life of actuarial duration. With the plan without a COLA that would provide a 7.5% payout with a 5% interest rate starting at 55 I'm going to take the lump sum pay out... It's a smallish amount of $35k. I'm going to buy into the second pension because it has a COLA and when I use a COLA of 3% I get an interest rate of 7%. The payout rate starts at 7.5% at 55 and increases to 12% when I hit 80.
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Old 11-24-2014, 01:27 PM   #36
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If people are planning out to ages like 95 I'm amazed that 50% of the votes on the poll would only buy an annuity with an internal interest rate of over 8%. Is this just prejudice against annuities? The payout rate you'll get for an SPIA today starting at 55 are around 5.5% with an interest rate of maybe 3.5% for an average life span, no matter how long you live your interest rate will never be more than 5.5%.....so that's not a good deal IMHO......but if you could get an interest rate of 6% and a payout rate of maybe 8% why wouldn't a healthy person going into retirement grab it?
I think it suggests some factors at work other than the numbers as presented. I don't know that I'd use the word "prejudice", because that would suggest "irrational or thoughtless" to me, and I can imagine rational and thoughtful people having issues with SPIAs other than rate.

It's like saying "What interest rate would you need to buy euro-denominated bonds?" I might pick a number that looks "high", because I don't want to take the currency exchange rate risk. I would not call that a "prejudice" against euro area countries. It simply reflects the fact that I've thought about another risk which may not be relevant to other people.
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Old 11-24-2014, 01:38 PM   #37
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I think it suggests some factors at work other than the numbers as presented. I don't know that I'd use the word "prejudice", because that would suggest "irrational or thoughtless" to me, and I can imagine rational and thoughtful people having issues with SPIAs other than rate.

It's like saying "What interest rate would you need to buy euro-denominated bonds?" I might pick a number that looks "high", because I don't want to take the currency exchange rate risk. I would not call that a "prejudice" against euro area countries. It simply reflects the fact that I've thought about another risk which may not be relevant to other people.
Yes, I agree, you make a good point. The big difficulty with a fixed annuity of substantial duration (whatever that is) is inflation....of course that's where the sales people jump in and start pushing the variable annuities. But a company pension with a COLA that has a rate of return twice that of the 30 year Treasury bond looks pretty good to me.
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Old 11-24-2014, 02:12 PM   #38
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Maybe I'm giving the ER community too much credit, but I expect many people on here do understand the basics of annuities and present value. I didn't put interest rates below 4% because I wanted to see how much above usual rates it would get people to bite. Anyway many annuities have 5% payouts and 3% interest rates today........ Depending on your age
I can tell by the responses that many of the replies confuse discount rate with the payout rate of the annuity. I've been following SPIA rates for at least ten years, and I don't believe the discount rate has even approached 4% during that period. At my current age in my 70's I can purchase, and I have purchased, SPIA's with a payout exceeding 10%. Without running the calculations, a 4% discount rate would probably put that payout well over 12% or so. I'd jump on that in a minute. As I assume you know, as the annuitant becomes older, mortality credits become much more of a factor than prevailing interest rates.
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Old 11-24-2014, 03:10 PM   #39
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I can tell by the responses that many of the replies confuse discount rate with the payout rate of the annuity. I've been following SPIA rates for at least ten years, and I don't believe the discount rate has even approached 4% during that period. At my current age in my 70's I can purchase, and I have purchased, SPIA's with a payout exceeding 10%. Without running the calculations, a 4% discount rate would probably put that payout well over 12% or so. I'd jump on that in a minute. As I assume you know, as the annuitant becomes older, mortality credits become much more of a factor than prevailing interest rates.
Bruce
Yes. If you get a quote for a single life annuity without COLA for a 55 year old male you'll get maybe a 5.5% payout and a 3% (or less) interest rate today. That sucks.......I certainly wouldn't buy an SPIA under those terms. But company pensions and people who have invested with TIAA can get substantially higher rates.
At 55, I would get an interest rate of about 5.8% and a payout rate of 7% from TIAA if I bought an annuity with my TIAA-Traditional account, and as I've already mentioned I'm going to buy into a company pension plan that with a 3% COLA would have a 7% interest rate...with a 0% COLA the interest rate goes down to 5%, but if anything, I expect the COLA to go up in the future.
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Old 11-24-2014, 03:15 PM   #40
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I will never buy a nominal SPIA, regardless of its payout rate, because of its vulnerability to inflation.
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