Join Early Retirement Today
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

Reply
 
Thread Tools Search this Thread Display Modes
Poll:At what discount rate would you buy SPIA?
Old 11-22-2014, 09:40 PM   #1
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,836
Poll:At what discount rate would you buy SPIA?

Ok, so some people will never buy an annuity because you give up your principal and some people buy them without much regard for the interest rate because it involves assumptions about longevity and an annuity is more about cash flow and a lower BP than investing. I'm not talking about the payout rate here, but the underlying interest rate that you need to do the present value calculation.

But what about those of us on the fence, how good would the annuity interest rate have to be before you bought it?
__________________

__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”

Current AA: 65% Equity Funds / 20% Bonds / 7% Stable Value /3% Cash / 5% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
nun is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 11-22-2014, 09:55 PM   #2
Moderator Emeritus
aja8888's Avatar
 
Join Date: Apr 2011
Location: The Woodlands, TX
Posts: 7,156
I think I'm in the camp of never buying an annuity.
__________________

__________________
......."Everybody has a plan until they get punched in the face." -- philosopher Mike Tyson.
aja8888 is offline   Reply With Quote
Old 11-22-2014, 10:24 PM   #3
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,836
Quote:
Originally Posted by aja8888 View Post
I think I'm in the camp of never buying an annuity.
I start from the assumption that I'm going to live at least as long as the actuarial tables say I will....because that's what I do for the rest of my retirement finances. I have one defined benefit pension that has a COLA and an interest rate of 7.6% when I do the present value calculation.....that's hard to ignore.
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”

Current AA: 65% Equity Funds / 20% Bonds / 7% Stable Value /3% Cash / 5% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
nun is offline   Reply With Quote
Old 11-23-2014, 12:03 AM   #4
Thinks s/he gets paid by the post
Sunset's Avatar
 
Join Date: Jul 2014
Location: Chicago
Posts: 4,726
I'd be more concerned with the payout amount compared to a withdrawal rate of 4% on X dollars. With a lifetime payout and minimum residual payout time of at least 20 yrs.

Why would the underlying interest rate be important since it ends up producing the payout amount which is what you get for X dollars ?
__________________
Sunset is offline   Reply With Quote
Old 11-23-2014, 06:59 AM   #5
Full time employment: Posting here.
 
Join Date: Jan 2013
Posts: 660
Even though OP made it clear that the poll is about annuity interest rates, the fact that the early results favor the higher interest rates leads me to suspect that at least some responses are from people who are using the payout rate instead of the interest rate. I currently have a 15 year annuity purchased through my pension plan, which has an annual payout of over 10% per year of the purchase price, but has an interest rate of "only" 5%. I contributed as much as I could, and would have contributed even more if the rules had allowed it. The choice was between getting a 5% return on my investment or getting maybe a couple of percent in a stable value fund or some other fixed income investment. To me it was a no brainer to take 5%, especially since the 10% per year payout made the duration of the investment much shorter than, say, buying a 15 year bond, where one has to wait the entire 15 years for return of principal.
__________________
karluk is offline   Reply With Quote
Old 11-23-2014, 07:32 AM   #6
Thinks s/he gets paid by the post
Huston55's Avatar
 
Join Date: Jul 2011
Location: The Bay Area
Posts: 1,801
Quote:
Originally Posted by nun View Post
I start from the assumption that I'm going to live at least as long as the actuarial tables say I will....because that's what I do for the rest of my retirement finances. I have one defined benefit pension that has a COLA and an interest rate of 7.6% when I do the present value calculation.....that's hard to ignore.
How did you calculate the interest rate?
__________________
You may be whatever you resolve to be.
Huston55 is offline   Reply With Quote
Old 11-23-2014, 08:12 AM   #7
Thinks s/he gets paid by the post
Car-Guy's Avatar
 
Join Date: Aug 2013
Location: Citizen of Texas
Posts: 2,476
I'm also in the camp of probably not buying an annuity. When I first retired a few years ago, it was on my financial radar of things to consider but it has fallen way down on my list for a number of reasons. Current interest rates, and longevity expectations certainly have been factors but I have also grown very comfortable that my conservative post retirement investment strategy will easily meet my needs.
__________________
Car-Guy is online now   Reply With Quote
Old 11-23-2014, 08:34 AM   #8
Thinks s/he gets paid by the post
MooreBonds's Avatar
 
Join Date: Aug 2004
Location: St. Louis
Posts: 2,091
I said 6%.

I'd be open to considering one, but since I'm only 37 currently, I have a number of years before getting to the "go/no-go" evaluation. It will depend on a host of variables that are still up in the air:

Future Social Security payments - I'll likely delay until 70 to make SS a little bit of a longevity hedge, but even if I take it at full age (67), that's 30 years of policy changes by Washington that will make any planning now a complete wild guess.

Future inflation - Economic factors can always change, but I would also look at what future inflation expectations might be. If I were in my early 60s today, I'd likely buy just 1/2 of an annuity, IF all other factors were equal, since I would be expecting future inflation starting, say, 8-10 years from now to be a little more significant than current.

Alternative rates - You'd also have to consider what other interest rate options are. If the annuity 'yield' is only 3%, and I can get 3% on a 10 year CD, I'm going with the CD. If I happened to find an annuity that paid reasonably higher than other rates I could find, I'd look very closely at it....but, the odds of such an annuity existing outside of a sweetheart pension clause in some small municipality's pension set-up are probably slim.

Overall portfolio and my minimum budget - If I could take just 1/4 of my portfolio and fund my "basic/minimum" living needs with a lifetime annuity, I'd strongly consider it, since it would help give a strong base. I'm hoping SS will function to do a good part of funding most of the basic budget anyway, so my needs for an annuity would be less - but I'd still consider it with the above variables. Since I'm hoping to be married down the road, the "minimum budget" is open to interpretation (and lifestyle creep) by the future Mrs. MooreBonds.
__________________
Dryer sheets Schmyer sheets
MooreBonds is offline   Reply With Quote
Old 11-23-2014, 08:35 AM   #9
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,836
Quote:
Originally Posted by Huston55 View Post
How did you calculate the interest rate?
I used online calculators for the present value of an increasing annuity and compound interest using the same interest rate for both calculations and adjusted the rate until the income match my pension income. I used the IRS life expectancy tables to come up with the number of periods. I then checked it with excel.

Present Value of a Growing Annuity

This way you can back out the interest rate as distinct from the payout rate, which is simply the ratio of the principal to the annual income you get....for a COLAed annuity/pension the payout rate changes....on my DB pension that starts at 7% at 55 and increases to 12% when I'm in my 80s.
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”

Current AA: 65% Equity Funds / 20% Bonds / 7% Stable Value /3% Cash / 5% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
nun is offline   Reply With Quote
Old 11-23-2014, 08:43 AM   #10
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,836
Quote:
Originally Posted by MooreBonds View Post

Future inflation - Economic factors can always change, but I would also look at what future inflation expectations might be. If I were in my early 60s today, I'd likely buy just 1/2 of an annuity, IF all other factors were equal, since I would be expecting future inflation starting, say, 8-10 years from now to be a little more significant than current.
The state pension/annuity that I'm going to buy into is inflation adjusted which makes it attractive and increased the underlying interest rate. I already have both US and UK SS that will start at 67 and both of those are also inflation linked....so I'll be well set for income that keeps up with inflation. The nice thing about the state pension is I can take it at 55 and bridge the gap between 55 and 59.5 without having to do 72t or tap my regular savings.
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”

Current AA: 65% Equity Funds / 20% Bonds / 7% Stable Value /3% Cash / 5% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
nun is offline   Reply With Quote
Old 11-23-2014, 08:49 AM   #11
Moderator Emeritus
aja8888's Avatar
 
Join Date: Apr 2011
Location: The Woodlands, TX
Posts: 7,156
My reasons for not considering an annuity are as follows:

1. DW and I currently collect over $45K in SS annually

2. I am starting the RMD phase and my annual IRA withdrawls are more than enough with the SS payments to cover living expenses and taxes.

3. We have fairly healthy non-taxable reserves in addition to the IRAs.

4. Our current living expenses are low and we have two paid off cars that are less than 2 years old.

Given that we are 70+ and have no loans, paid for house, etc and a portfolio that has ample reserves, I see no need to annuitize a big lump of cash.

Why would I need any annuity?
__________________
......."Everybody has a plan until they get punched in the face." -- philosopher Mike Tyson.
aja8888 is offline   Reply With Quote
Old 11-23-2014, 08:54 AM   #12
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,836
Quote:
Originally Posted by Sunset View Post
I'd be more concerned with the payout amount compared to a withdrawal rate of 4% on X dollars. With a lifetime payout and minimum residual payout time of at least 20 yrs.

Why would the underlying interest rate be important since it ends up producing the payout amount which is what you get for X dollars ?
Well its a good way to see if you are getting anything better than the prevailing annuity rates and see how that rate fits in with your financial plan. It's probably only worth doing if you have a work related plan that might be better than the one you'd buy form an insurance company.
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”

Current AA: 65% Equity Funds / 20% Bonds / 7% Stable Value /3% Cash / 5% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
nun is offline   Reply With Quote
Old 11-23-2014, 08:54 AM   #13
Thinks s/he gets paid by the post
 
Join Date: May 2014
Location: Utrecht
Posts: 2,211
Quote:
Originally Posted by nun View Post
But what about those of us on the fence, how good would the annuity interest rate have to be before you bought it?
The annuity interest rate is only part of the equation (a big part though).

I would buy a SPIA if and only if the interest rate becomes substantially higher (say 2%) than the withdrawal rate I can afford to fund my maximum remaining life.

In practice, this means the moment to go SPIA is when the variability in my remaining life years becomes very large in proportion to my average expected remaining life.

Say I was 75 years old. There is a <1% chance I'll make it to 100, on average though I'll be dead within 10 years. For planning purposes however, I need to take the maximum scenario into account.

So, I need +/- 25 years of expenses to fund the maximum scenario, let's say that amounts to a WR of 6% if I do it with my own capital.

Now, a SPIA might yield me 9% at that point, so it makes sense to go for it then, but only barely. Especially since I'll be giving up inflation adjustments.

The crux of the matter is that you stop self-insuring your longevity 'risk' when the variability becomes too high.

Note that this scenario only makes sense when you are not considering leaving money to heirs.
__________________
Totoro is offline   Reply With Quote
Old 11-23-2014, 08:57 AM   #14
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,836
Quote:
Originally Posted by aja8888 View Post
My reasons for not considering an annuity are as follows:

1. DW and I currently collect over $45K in SS annually

2. I am starting the RMD phase and my annual IRA withdrawls are more than enough with the SS payments to cover living expenses and taxes.

3. We have fairly healthy non-taxable reserves in addition to the IRAs.

4. Our current living expenses are low and we have two paid off cars that are less than 2 years old.

Given that we are 70+ and have no loans, paid for house, etc and a portfolio that has ample reserves, I see no need to annuitize a big lump of cash.

Why would I need any annuity?
I agree.
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”

Current AA: 65% Equity Funds / 20% Bonds / 7% Stable Value /3% Cash / 5% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
nun is offline   Reply With Quote
Old 11-23-2014, 08:58 AM   #15
Thinks s/he gets paid by the post
 
Join Date: Oct 2006
Posts: 3,813
My answer depends on what I'm selling to pay for the SPIA.

Suppose I'm selling long term bonds that have about the same interest rate as the insurance company will get when it invests my SPIA premium.

In this case, the question is moot. I've already "locked in" that interest rate. There is no interest gain or loss when I sell the bonds and buy the annuity.
__________________
Independent is online now   Reply With Quote
Old 11-23-2014, 09:14 AM   #16
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,836
Quote:
Originally Posted by Independent View Post
My answer depends on what I'm selling to pay for the SPIA.

Suppose I'm selling long term bonds that have about the same interest rate as the insurance company will get when it invests my SPIA premium.

In this case, the question is moot. I've already "locked in" that interest rate. There is no interest gain or loss when I sell the bonds and buy the annuity.
This is why it's good to look at the underlying interest rate. My state pension has a calculated rate of return of 7.6% given an average lifespan. That looks like a good replacement for my bond investments. I will sell equities to buy into the plan, but then rebalance so that my remaining portfolio is almost all equites. A 7.6% return on the fixed income bit of a portfolio is nice, that's a nice premium over long term bond rates.

There are risks though. The politicians could change the terms or default.
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”

Current AA: 65% Equity Funds / 20% Bonds / 7% Stable Value /3% Cash / 5% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
nun is offline   Reply With Quote
Old 11-23-2014, 09:23 AM   #17
Full time employment: Posting here.
 
Join Date: Jan 2013
Posts: 660
Quote:
Originally Posted by Independent View Post
My answer depends on what I'm selling to pay for the SPIA.

Suppose I'm selling long term bonds that have about the same interest rate as the insurance company will get when it invests my SPIA premium.

In this case, the question is moot. I've already "locked in" that interest rate. There is no interest gain or loss when I sell the bonds and buy the annuity.
This is a very good point. My reason for jumping at the chance to buy a 15 year annuity with a 5% interest rate is that I was taking the money out of the fixed income portion of my portfolio and leaving the other asset classes untouched. I immediately got roughly a 3% boost in yield (5% in the annuity vs. about 2% from what I sold to buy it.)

You also have to look at duration. Selling long term bonds to purchase an annuity will tend to shorten your duration, because the annuity payments are partly an early return of principal. The annuity offers better protection against a future rise in interest rates because you can reinvest more money sooner at the higher rate. However, the annuity is worse than a long term bond with the same rate if interest rates stay low.
__________________
karluk is offline   Reply With Quote
Old 11-23-2014, 10:27 AM   #18
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,836
Quote:
Originally Posted by karluk View Post
This is a very good point. My reason for jumping at the chance to buy a 15 year annuity with a 5% interest rate is that I was taking the money out of the fixed income portion of my portfolio and leaving the other asset classes untouched. I immediately got roughly a 3% boost in yield (5% in the annuity vs. about 2% from what I sold to buy it.)

You also have to look at duration. Selling long term bonds to purchase an annuity will tend to shorten your duration, because the annuity payments are partly an early return of principal. The annuity offers better protection against a future rise in interest rates because you can reinvest more money sooner at the higher rate. However, the annuity is worse than a long term bond with the same rate if interest rates stay low.
Nice analysis, I also think about buying into my state pension as replacing fixed income in my portfolio. Currently I'm at a 60/40 AA and I'm going to use about 20% of my portfolio to buy into the pension and then go 100% equities as the pension, together with some rental income, will cover my expenses.
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”

Current AA: 65% Equity Funds / 20% Bonds / 7% Stable Value /3% Cash / 5% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
nun is offline   Reply With Quote
Old 11-23-2014, 10:36 AM   #19
Thinks s/he gets paid by the post
Car-Guy's Avatar
 
Join Date: Aug 2013
Location: Citizen of Texas
Posts: 2,476
Another consideration is the health of the insurance company that would be backing the annuity over the next 20, 30 or more years. They are not FDIC insured but I understand most (maybe all) states have an insurance guaranty association (GA) that backs up the insurance company policies in the event of a bankruptcy. Seems I've also read that the bankruptcy insurance amounts can vary by state. I've haven't checked recently but a few years ago I knew that some states had 100k and some had 250k limits.

I also read an article recently claiming that at least 20 insurance companies have failed between 2003 and 2011 and the GA's had to rescue some policy holders. It was unclear if these policy holders got all of their money (up to the insured limits) or not.

I know when I was considering SPIA's in the past, I had planned to spread them out over several different insurance companies to stay below the insurance limits of my state.

Just something else to consider and read up on before buying.
__________________
Car-Guy is online now   Reply With Quote
Old 11-23-2014, 10:42 AM   #20
Full time employment: Posting here.
 
Join Date: Jan 2013
Posts: 660
Quote:
Originally Posted by nun View Post
Nice analysis, I also think about buying into my state pension as replacing fixed income in my portfolio. Currently I'm at a 60/40 AA and I'm going to use about 20% of my portfolio to buy into the pension and then go 100% equities as the pension will cover my expenses.
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 equvalent 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.
__________________

__________________
karluk is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
To SPIA or not to SPIA - a new study mathjak107 FIRE and Money 24 08-06-2013 08:36 AM
How and where did you buy your SPIA nun FIRE and Money 10 05-23-2011 10:02 AM
Recession over? Buy, buy, buy? NW-Bound FIRE and Money 42 05-27-2009 05:53 PM
Discount Rate Change in 2012? Ratherbfishn' FIRE and Money 3 08-07-2008 09:50 AM
Implied inflation rate in an inflation adjusted SPIA cashflo2u2 FIRE and Money 6 04-30-2008 08:24 PM

 

 
All times are GMT -6. The time now is 09:24 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.