Poll:At what discount rate would you buy SPIA?

[Huston55]

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/Modern_Portfolio_Decumulation.pdf. Same basic concept as Otar's green-gray-red zones.

+1

Our current plan as well.

 

[jerome len]

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.

 

[Senator]

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.

 

[nun]

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.

 

[Gill]

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

 

[nun]

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

 

[karluk]

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.

 

[sengsational]

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!

 

[karluk]

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.

 

[nun]

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.

 

[Independent]

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.

 

[nun]

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.

 

[Gill]

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.
Bruce

 

[nun]

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.

 

[longinvest]

I will never buy a nominal SPIA, regardless of its payout rate, because of its vulnerability to inflation.

 

[Car-Guy]

You're not going to get intelligent replies to this poll because most people don't understand present value concepts.

Most people may not understand the concepts (I really don't know) but I would "expect" most of the people that frequently read or post on this forum do understand the present value concepts. It's pretty basic stuff if you are investing.

 

[sengsational]

How would you feel about 4% for an annuity with, say, a two year term?

Maybe I misunderstood. I thought we were talking about a life annuity. If the instrument has a fixed term, then I might not call it an SPIA...I'd call it a CD.

 

[karluk]

I will never buy a nominal SPIA, regardless of its payout rate, because of its vulnerability to inflation.

Saying "never" to an annuity, regardless of terms, is quite a hazardous undertaking, indeed. It invites questions about just how seriously you would adhere to your intention, as the terms of the annuity get sweeter and sweeter.

For example, would you turn down an annuity that allowed you to invest $100k and receive $100k per month for the rest of your life? What sort of future inflation is so dangerous that would make such terms something you would turn down?

Think that's not realistic? It's easy to come up with real life examples of annuity-like products with just as attractive terms, or even better. An example is a winning lottery ticket that was purchased for $2 and offers, say, 20 million dollars per year payouts for the next 20 years. You may turn this down as unlikely to keep up with inflation over the next 20 years, but I suspect most people would be willing to take the risk.

My expectation is, if people really considered all of the angles, there is generally an interest rate that is attractive enough to tempt them to annuitize some of their nest egg. OP's poll is trying to narrow down a little just where that tipping point is.

 

[Gill]

I will never buy a nominal SPIA, regardless of its payout rate, because of its vulnerability to inflation.

Here's an example supporting my contention that most people don't understand annuities. You say "regardless of its payout rate". I think I could find a payout rate that would entice you into buying a SPIA. You just don't know it yet.

Also, is it necessary to have every asset in your portfolio inflation proof? I have SPIA's, Corporate bonds, TIPS, I-Bonds and common stocks. Of course the SPIA's are vulnerable to inflation, but don't you think the balance of the portfolio looks pretty sound?
Bruce

 

[gauss]

Has anyone done the calculation on what the equivalent discount rate is implied in delaying drawing SS until age 70?

Are you assuming that all costs are included by the discount rate?

I like the concept of annuities, especially the ones that won't payout until you attain age 85 or so, to exploit the mortality credits.

I have concerns with annuities in the following areas:
- expenses/costs
- longevity assumed in pricing
- concerns that current DB pensions may be sold to an annuity company that may put me at risk of exceeding state guarantee amounts for failed financial institution.

 

[sengsational]

Has anyone done the calculation on what the equivalent discount rate is implied in delaying drawing SS until age 70?

I thought it was 8%.

 

[Totoro]

Here's an example supporting my contention that most people don't understand annuities. You say "regardless of its payout rate". I think I could find a payout rate that would entice you into buying a SPIA. You just don't know it yet.

longinvest I would assume is referring to 'SPIAs realistically available'.

Also, is it necessary to have every asset in your portfolio inflation proof? I have SPIA's, Corporate bonds, TIPS, I-Bonds and common stocks. Of course the SPIA's are vulnerable to inflation, but don't you think the balance of the portfolio looks pretty sound?
Bruce

My view: since inflation is unknowable and highly variable it is nigh impossible to assess whether any SPIA without inflation adjustment will be a sound investment. You lock in the interest rate for the rest of your life, inflation can go anywhere. Especially with current offered rates.

Since a main function of a SPIA is to offer protection against longevity risk a non-COLA one loses much of its appeal: By the time the longevity materializes cumulative inflation could have gone virtually anywhere.

That said, a non-COLA SPIA is still a great deflation hedge, so if that's what you are going for in your portfolio it has a place.

 

[sengsational]

Here's an example supporting my contention that most people don't understand annuities. You say "regardless of its payout rate". I think I could find a payout rate that would entice you into buying a SPIA. You just don't know it yet.

Also, is it necessary to have every asset in your portfolio inflation proof? I have SPIA's, Corporate bonds, TIPS, I-Bonds and common stocks. Of course the SPIA's are vulnerable to inflation, but don't you think the balance of the portfolio looks pretty sound?
Bruce

I think they understand realistic SPIA's! Yeah, I give the insurance company a penny, and they give me $100,000 per month...I'd take it. But how realistic is that? I think we must assume that all replies on this thread that are not interested in an SPIA are basing that on what is currently and realistically available.

If I don't have to put a portion of my portfolio into something that could get whacked by inflation, I'm not going to do it! A TIPS ladder would be better.

 

[Totoro]

I thought it was 8%.

Random google link explains it quite nicely:
Delayed Social Security Retirement Benefits as an Investment | Social Security Choices

It's age and sex dependent (longevity).

 

[nun]

My expectation is, if people really considered all of the angles, there is generally an interest rate that is attractive enough to tempt them to annuitize some of their nest egg. OP's poll is trying to narrow down a little just where that tipping point is.

Exactly. Even with a COLA the underlying interest rate to support the annual inflation adjustment can be calculated, it's just an increasing annuity. So as my employer's pension has a COLA it bumps up the internal interest rate to 7% assuming a 3% annual COLA which is what it was last year. If I was to use 1970s inflation numbers like 10% for the COLA the interest rate would have to be 15%.

So would anyone turn down a single life annuity with a 7% internal rate of return given a 3% COLA?