SPIA threads

[DblDoc]

You are correct! I used 50/50 stock-bond asset allocation and a 1% expense ratio. The 1% ER is below the normal ER and seems reasonable. Regarding stock exposure, I don't think many 65 to 85 year old's are comfortable with even a 50% exposure to stocks. You are correct regarding the possibility of getting a lower ER. However, most of us are market timers with our emotions (i.e., DALBAR) and will probably do much worse than FIRECALC returns. Even if one ends up with making it, the uncertainty of not knowing (even if FIRECALC says 100%) is uncomfortable for many.

Not for this board .

DD

 

[REWahoo]

Not for this board .

Yep.

ral, in addition to this mischaracterization of your audience, you've apparently decided we are all market timers, prone to give in to our emotions whenever the market fluctuates, and would gain peace of mind and sleep better at night by placing our trust - and half our assets - in the insurance industry.

How much time have you spent reading this forum?

 

[M Paquette]

Not for this board .

DD

Heh!

Current expense ratio is 0.13%. Nominally 55/45 stock/bond portfolio with the Usual Suspects... Fama/French three-factor tweakage and a dollop of international... Last 'trade' was in a combination of tax loss harvesting and a rebalance in February 2009.

I might have to rebalance again next year.

Somehow I don't think I'm this guy's target market.

 

[Dawg52]

One reason some feel OK with giving up some of their money(not half) to an insurance company is because no one can predict how well their brains will be working in the golden years. My mom is 93 and in a nursing home. She would be an easy target for a scam. Of course I'm there to swat the pest away, but I may not have someone to give me guidance if I'm lucky enough to live that long. An SPIA would at least make sure you have some monthly income along with SS.

I'm one of those struggling with the idea of giving up a chunk for one of these, but I will give it a serious review when I hit my mid 60's. Of course I'm still a young pup, so plenty of time to sleep on it.

 

[jdw_fire]

To be fair to the board pre-crash most of the annuity questions, were generally in the form of "my Amerprise adviser thinks I should get an annuity that will guarantee a zillion dollar per year, but I am a little suspicious" 90% of the time the annuities turned out to be variable or EIAs. The opposition for SPIA hasn't been particular strong. In fact for those folks over 65 with limited means, many of us think they are a good idea. But that doesn't describe many of the forum member.

i must disagree with you about the "the opposition for SPIA hasn't been particular strong" and i point you to this thread as evidence. http://www.early-retirement.org/forums/f29/fyi-ben-steins-views-on-asset-allocation-21088.html if you read it you will notice 2 things that support my disagreement with your statement. 1) the vigurous opposition (even to the point of sarcasm and misrepresentation) in this thread toward the use of a SPIA and 2) the observation by some of the posters as to the receiption even the suggestion of using annuities gets on this board (thus people at that time knew the board in general viewed SPIAs poorly).

 

[clifp]

i must disagree with you about the "the opposition for SPIA hasn't been particular strong" and i point you to this thread as evidence. http://www.early-retirement.org/forums/f29/fyi-ben-steins-views-on-asset-allocation-21088.html if you read it you will notice 2 things that support my disagreement with your statement. 1) the vigurous opposition (even to the point of sarcasm and misrepresentation) in this thread toward the use of a SPIA and 2) the observation by some of the posters as to the receiption even the suggestion of using annuities gets on this board (thus people at that time knew the board in general viewed SPIAs poorly).

I am don't want to get in to a semantic argument about what strong opposition means. But Nords, ReWahoo and other all expressed a similar sentiment to this quote from CFB

Granted if you're older, have limited resources and expect a really long lifespan against the IRS life expectancy tables...may be a good option. An income stream, even a small one, also helps portfolio lifespan quite favorably, so a small annuity might be a nice idea. Its just that its 10th or 12th on my list of good places to put my money and I havent gotten past the 3rd or 4th option yet.

Now it is probably true that events of the last few years raised the value of annuity, it may have even moved up from 10th to 7th place on CFB and my priority. So if you want to call this annuity hating ok.

I've been pretty consistent over the years. "Annuities should be bought not sold", but sadly I bet the vast majorities of annuities are sold. To the extent that this board is about early retirement, which to me means 62 and younger, and the poster have above average wealth, and significantly above average financial sophistication, I don't think you'll see most posters too excited about these products.

There are a lot of risks which I think get glossed over by proponents, in some cases they are ones that people haven't even discussed. For instance we are in the process of moving my 86 year old mom, in to an assisted living. The nicer one we have found both in Hawaii and her current home of Oregon require substantial buy ins from $300,000 - $700,000 in one case. If you annuitized your $1 million when you turned 65 you are SOL if you want to move into one of these places. Needless to say I am glad I didn't do this when I took over her finances a decade ago.

 

[chinaco]

... If you annuitized your $1 million when you turned 65 you are SOL if you want to move into one of these places. Needless to say I am glad I didn't do this when I took over her finances a decade ago.

I think some of the debate tends to be with people using the all or nothing scenarios.


If one had $1M, would it be wise to spend all of it on a SPIA? I would not do it. However, assuming one has a reasonable expectation that they will not die young... what about 1/3 of of the nest egg to buy a SPIA to supplement SS and create a solid base income? It reduces risk in a number of ways.

It is a financial instrument that can be used very effectively. It can provide several benefits... two of the most obvious: some amount of longevity mitigation and often an increased payout (compared to a conservative the x% method).

There are a number of strategies that can be used that make very good sense.

The problem is (as you stated).... they are often sold inappropriately to people (because of the commission).

People need to realize: Life Insurance Agent {does not necessarily equal} Financial Planner.... for that matter even financially competent. It often just means salesperson that can hand out (or quote) marketing material, fill out the paper work, and is licensed to sell in a state.

I would never... NEVER, rely on a life insurance agent for financial help. That is the part that disgusts me about paying a commission.

While the life insurance industry is needed... I hold their method of distribution of the products in contempt. Sales Commissions are an incentive to "Just Sell it"!


What America needs is a good "no commission" SPIA (sold direct)!

 

[rescueme]

What America needs is a good "no commission" SPIA (sold direct)!

Like the one I/DW purchased? Yes, it is so, since no sales commission was paid nor any annual "maintenance fee" is paid, per our SPIA contract, through FIDO. Upon my questioning of this, they responded with the fact that they would be paying me (under a contracted payment schedule), and would be responsible for covering both their expenses and "profit" by investment techniques, using my premium. They were taking on the risk (and profit) possibilities, in the future.

I'm not saying all SPIA contracts are the same. Again, I only speak for ourselves, who actually have a contract.

BTW, for the poster that said that most 65+ folks are not comfortable with 50% equities, I'll respond that DW/me (at 63 years of age - close enough to 65) do hold 50% equities. Why? The SPIA adds to the security of having a perceived "higher than normal" exposure to equities, for our long term financial goals. We can afford to be more agressive on the equity side since our current/future income needs are met by SS, pensions, and of course the SPIA.

 

[clifp]

I think some of the debate tends to be with people using the all or nothing scenarios.


If one had $1M, would it be wise to spend all of it on a SPIA? I would not do it. However, assuming one has a reasonable expectation that they will not die young... what about 1/3 of of the nest egg to buy a SPIA to supplement SS and create a solid base income? It reduces risk in a number of ways.

Seems sensible to me and in fact if they person had only $500,000 and only social security, I'd generally suggest delaying SS, tell 70 which is a form of buying an annuity. Going ahead and purchasing a commercial annuity with most of the remaining assets at 70. This would probably provide the most comfortable retirement.

What America needs is a good "no commission" SPIA (sold direct)!

Any time I respond to annuity question. I always use Berkshire Hathaway's EZ Quote or the TSP annuity calculator. I do so for two reason first I have a high confidence that Buffett's company will actually be around in 30 to 40 years to pay off the annuity and second it is direct sales eliminating insurance salesman commission. Interestingly enough the Berkshire Annuities Quote aren't often the highest. FYI, I'd also trust Brewer's opinion as to whom is safe, the guyuse to study insurance companies for a living...

 

[ral3210]

Yep.

ral, in addition to this mischaracterization of your audience, you've apparently decided we are all market timers, prone to give in to our emotions whenever the market fluctuates, and would gain peace of mind and sleep better at night by placing our trust - and half our assets - in the insurance industry.

How much time have you spent reading this forum?

You might be right. If so, I applaud those who can keep "their head when all about them are losing theirs." However, most of the polls I have seen on this board have very few respondents compared to the views on their corresponding threads. Therefore, they are subject to nonresponse bias, as well as other problems. In addition, many may provide socially desirable answers (in keeping with the themes of this board) rather than true answers. We often don't discuss our losses but brag about our wins. Cognitive dissonance plays a role in our attitudes and our behaviors. I have seen successful people take unneeded risks with poor outcomes that has permanently lowered their living standards (I've also seen unneeded risks result in tremendous gains). My whole point and advice has been: Have enough guaranteed income to at least cover your basic needs in retirement. This guaranteed income does not have to come from SPIAs. It could come from pensions, ss, or even (to some extent) bonds, MLPs, and high dividend paying stocks. Regarding Variable Annuities and salesmen: I do not think VAs are optimal for most people. There are better ways that are less expensive to get the guaranteed income. I try to avoid salespeople because I know that the more they are involved the less I wll make. However, it behooves each investor to do his/her research to invest in the appropriate manner unique to him/her. Mistakes made in retirement can permanently lower one's standard of living.

 

[Webzter]

However, most of the polls I have seen on this board have very few respondents compared to the views on their corresponding threads. Therefore, they are subject to nonresponse bias, as well as other problems. In addition, many may provide socially desirable answers (in keeping with the themes of this board) rather than true answers.

Hard to say. I'd imagine the view counter goes up each time a thread is clicked so poll respondents checking back to see the poll and attached discussion will drive that up.

As for the second part, it may be true, or it may be your bias. It might be an interesting study to undertake. I know you said you're an academic so a fun societal anthropology expedition to embark on might be to join a local Bogleheads group. At least on the investing front, I'd suspect there's a significant enough value cross-over that their current attitudes might be an acceptable stand-in. Obviously, you might still be dealing with members who are attempting to conform to the group's pressure, and a localized group might be too skewed, but it's a start.

At the Bogleheads group I went to, we discussed AA (percentages, no numbers), fears, concerns, trends, etc. I also suspect people are more forthright and less likely to exaggerate in person but that's just my bias talking.

 

[REWahoo]

This guaranteed income does not have to come from SPIAs. It could come from pensions, ss, or even (to some extent) bonds, MLPs, and high dividend paying stocks.

We can certainly agree on the portion of your quote I emphasized above. A conservative income fund such as Vanguard Wellesley, which has been mentioned hundreds, if not thousands of times on this board over the past nine years, can provide income and allow a retiree to retain ownership of their nest egg.

Plus, the reduced volatility of a balanced fund helps dampen the knee-jerk reaction of us non-response biased, socially-desirable-answer types and keep us away from the "sell" button in times of high volatility - cognitively speaking, of course.

 

[rescueme]

always use Berkshire Hathaway's EZ Quote or the TSP annuity calculator. I do so for two reason first I have a high confidence that Buffett's company will actually be around in 30 to 40 years to pay off the annuity and second it is direct sales eliminating insurance salesman commission.

Just be aware that BH does not allow use of tax-deferred (e.g. "qualified") funds for use in their annuities. At this time, all premiums must be made with post-tax funds, which may make a difference in those that consider such a vehicle.

Look in the FAQ on the site for the facts in this area...

 

[Gumby]

In addition, many may provide socially desirable answers (in keeping with the themes of this board) rather than true answers.

It has always seemed to me that the people who end up on this forum are not the timid, follower types who would be inclined to give a "socially desirable" answer. Retiring early, or even contemplating it, requires one to march to the beat of a different drummer.

 

[rescueme]

...requires one to march to the beat of a different drummer.

Yes ...

We choose to travel the path less chosen (and even in the area of SPIA's )...

BTW, I'm one of those who argued with "the bunny" years ago, while I was investigating annuties (all types). His comments did not match up with my research, at the time, when I was contemplating employment.

However, he's left the board and I have my SPIA (and I'm retired). Blame it on "survivorship basis", if you wish...

 

[Ready-4-ER-at-14]

I have some fears about cash flow that an annuity soothes in theory.

I know Ray Lucia in his Buckets of Money strategy uses annuities as a portion of his income. (bucket 2 I believe and short term for years 7-14 or\f retirement)

We would like both of us to be retired and traveling when there is a small number of years before the first of us could draw maximum social security.
Some short term cash is appealing.

We dealt with some of this by having a fixed amount (inflation guesstimated) of zero coupon treasuries come due each year for about half of our fixed current expenses for maybe 20 years.

To get the other half we can draw down from one of the 401k's OR put about 1/4 of the retirement money into annuities.

What gives me the hesitation about what to do is my projection for interest rates in the future. Should interest rates double I can get the annuity for about half the price quoted now or just reinvest old money into other fixed income.

To me the draw of an annuity is to be able to be relatively indifferent to the market. Losing or gaining an auto daily in a volatile market loses the thrill.

Ideally the cash flow should have a component safe from changing interest rates, and government tax decisions about corporate dividends.

 

[chinaco]

Like the one I/DW purchased? Yes, it is so, since no sales commission was paid nor any annual "maintenance fee" is paid, per our SPIA contract, through FIDO. Upon my questioning of this, they responded with the fact that they would be paying me (under a contracted payment schedule), and would be responsible for covering both their expenses and "profit" by investment techniques, using my premium. They were taking on the risk (and profit) possibilities, in the future.

I'm not saying all SPIA contracts are the same. Again, I only speak for ourselves, who actually have a contract.

...

Are you sure about that? Do you have a SPIA or a VA (payout annuity)

SPIAs have to be sold by a licensed agent. They typically get some sort of commission. Fidelity has an Insurance Agency that sells other insurance companies SPIAs.

 

[rescueme]

Are you sure about that? Do you have a SPIA or a VA (payout annuity)

SPIAs have to be sold by a licensed agent. They typically get some sort of commission. Fidelity has an Insurance Agency that sells other insurance companies SPIAs.

We have an SPIA via Fidelity. Their "insurance/annuity branch" had folks (with their insurance license) that are paid a salary, along with a slight bonus (not commission) on the amount they "sell". However, they do not act as a strict "commissioned agent" as a third party agent would normally act as.

Our contract (after much discussion with them on the subject) reflects that fact.
I’m not saying that is the situation of today; however it was the situation when we executed our contract in July, 2007.

Look at the site, http://www.immediateannuities.com/ I believe it will tell you what you can get from an insurance company as a monthly payment, based upon a certain premium base. Nowhere does it say "subject to sales charge or annual fee", that I know of. Our SPIA is the same way. We are taking the risk that the insurance company can pay the stated monthly income, for the rest of our lives. The insurance company is taking the risk that they can meet that commitment, along with providing a return for themselves, and their investors (e.g. shared risk).

The information on this "technique" is out there, if you are serious on pursuing this path, and if you are willing to do the research - as we did.

It's really not as difficult as some on this thread/forum would make you believe. Their "thoughts" are based upon assumptions (since they don't have an SPIA). Ours on the other hand is based upon fact, since we have actually gone through the process.

Do your own research and reach your own conclusion. Don't base your decisions upon other's opinions, IMHO. If you do the research and it doesn’t work as you believe it should, at least you can walk away with a bit of knowledge, rather than somebody's (who hasn’t done the actual investigation) of the product.

 

[Meadbh]

When I am Doris' age I will probably consider an annuity.

A prescription for stretching the money - The Globe and Mail

 

[REWahoo]

From the article:

A healthy 90-year-old – a Betty White look-alike..

If I reach age 90 and look like Betty White, I'll buy one too.

 

[kumquat]

There is also no carrier risk in the case of my pension purchase option.

Why not? I'd guess that there is a risk, however small, that even government pensions may be subject to change via legislation.

 

[Nords]

Why not? I'd guess that there is a risk, however small, that even government pensions may be subject to change via legislation.

You're right by experience, but Brewer's right by virtue of the market (including its analysts) judging a government agency's payouts to be risk-free.

Unlike many corporate pensions, changes to military pensions have been imposed only on the recruits. There are people still on active duty who are eligible for a military pension system that ended back in 1980. A few of them might still be on active duty in 2020.

 

[ziggy29]

From the article:If I reach age 90 and look like Betty White, I'll buy one too.

If we keep cranking out more and more of these, it's no wonder insurance products that provide protections into old age keep getting into trouble.

 

[brewer12345]

Why not? I'd guess that there is a risk, however small, that even government pensions may be subject to change via legislation.

I figured someone would quibble. Not carrier risk, per se. More like legislative risk.

 

[kumquat]

Ok, sorry, thought you were in the private sector.