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Old 05-27-2011, 05:11 AM   #1
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SPIA threads

Seems like there's a lot of interest in this lately.

When I first came to ER 2 or 3 years ago, there were a few threads, some became long with some passionate posts. The consensus here seemed to be that they weren't worth it.

Instead people were citing Wellesley a lot.

Now, it seems the opposition to it has softened.

Sign of the times? Market uncertainty more palpable? SPIA payouts are worse than it was 2 or 3 years ago but it seems criticisms of the idea of SPIA seem less pronounced.
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Old 05-27-2011, 06:29 AM   #2
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My opinion of SPIA's hasn't changed. I think in limited circumstances, in small amounts and for certain individuals a SPIA might make sense. I don't happen to fit into that category.

Edit: Almost forgot - "Psst. Wellesley."
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Old 05-27-2011, 06:52 AM   #3
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I think Prof. Milevsky's research on the subject is reasonably convincing. But I think that SPIAs are best purchased at older ages (60s or even 70s) to cut off the tail of longevity risk, so they have limited applicability for us yunguns. And SPIAs come with their own risks, most notably inflation and carrier risk.

I am interested to watch the development of the longevity insurance market, which may be an attractive, relatively inexpensive way to hedge longevity risk. Time will tell, and I would be extremely picky about the carrier.

I am also a lot more interested in vesting in a pension since reading Milevsky's work. My employer allows retirees in active payout to purchase extra pension credit with 401k funds. If this option is still open when I am ready, it could be an extremely valuable benefit and worth putting up with a few more years of nonsense.
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Old 05-27-2011, 07:29 AM   #4
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Conversely, the discussion lately is around SPIAs (even by new posters asking questions) and the VA mass-thread-wars seem to have died off.

If nothing else, 2008-now gives someone a much better understanding of their risk tolerance and some people may be willing to trade market risk for carrier risk for a certain percentage of their egg.
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Old 05-27-2011, 08:22 AM   #5
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Now, it seems the opposition to it has softened.
I would agree, and IMHO it's because folks now know a bit more about the subject than years ago.

Part of that may be miss/unknown information on the subject of "annuities" in general but it also seems that for many on this board who had/will have a federal/local government pension, the idea of an annuity makes little sense. Heck, they are getting one with their monthly pension payment along with possible other income, such as SS.

As for me (and DW) our decision to retire at age 59 and without SS (at least till age 62) nor a pension (I have none; DW has two small single-life pensions at age 65) meant that we would be "going naked" in our early years of retirement, and living only on our individual retirement investments, plus current taxable savings.

According to various calculators (along with our own spreadsheets), it looks like our plan would have worked, so regardless of the (market) risk, we continued to plan on retirement, in early 2007.

Two years before that date (early/mid-2005) we started actions to prepare for the target date of May, 2007. Part of that preparation was a change to our AA (at the time, 90/10 - 90% equity, 10% bond-cash) to an "ER" AA of 60/40 (60% equity - 40% bond-cash). At the same time, we made the decision on forming our "retirement income cash buckets". That is create a fund for each of us that would contain 3-4 years of anticipated expenses, and also including required taxes to be paid - since the majority of our retirement savings is in tax-deferred instruments).

During the period of 2005-07, I ran forecasts on a daily basis using available "free" tools, such as FIRECalc, VG's Financial Engines, and FIDO's Retirement Income Planner. Since we have substantial investments at both VG & FIDO, uses of the tools were free. Being M* Premium members, we also used their forecast tools to do some analysis at the amount of income we could expect from our joint portfolio (without any other income, such as SS or pensions) over the long term.

While the numbers were good, we were looking for better. Actually, I did not start looking at annuity (all kinds) options until being made aware of the option via the FIDO RIP tool. Sure, FIDO sold annuities, but they also included the "what if" factor within their retirement tools for consideration - regardless of vendor.

What I found was that while our plan was good, it could be much better if we would consider an annuity. That started me (late in 2005) to look into the option that an annuity could provide.

While I started my research (using the net, which led me to many "annuity" discussions), I also found info from such sites as http://www.immediateannuities.com/ along with requesting annuity info from both VG & FIDO.
It took me quite a few months to absorb the vast amount of info concerning the various types of annuities, and also trying to match the options (such as a VA) to our joint appetite for risk.

In 2006 (or there about) I discussed the subject on this forum, and was met with scorn by a few of the (past) posters on the subject. While everybody is certainly entitled to their opinion, what I was hearing was not necessarily in sync with my personal research info, and I'm sure that I made few friends during that time.

Regardless of that, I continued to run daily forecasts of what our plan would look with/without an SPIA (which I decided met our needs, over a VA) and the results (regardless of forecast tool) wound up much better.

During this time (about a year before actual retirement), I started to look at other income options, specifically SS. While I always "assumed" that I/DW would be employed in some manner and take SS at our FRA (we're the same age) of 65 (later, age 66), once we decided on ER, we had to look at taking it at age 62 in order to provide ER income, along with delaying withdrawals from our respective retirement portfolio's.

I again started "running the numbers" through various calculators, and found that the purchase of the SPIA would allow us to delay SS till our respective FRA's at age 66, but also (further research would reveal) that I could claim a 50% spousal benefit against my DW when she reached FRA age, which would provide additional income and allow me to delay SS till age 70 - both to maximize my income, but more importantly provide to my DW (assuming I died first) a survivor benefit that would be almost 2x of her FRA age SS.

The numbers worked. We decided to purchase an SPIA when I turned 59.5, two months after I retired, four years ago. BTW, it was purchased with 10% of our joint portfolio value (yes, over the state guarantee, but that's one of the things I did not know about back then, but is often discussed now) and it has worked out well.

I/DW are age 63 and don't expect to draw SS till age 66/70 (per our plan). The SPIA is acting as a "pension" to us. BTW, our joint portfolio's are valued at slightly more than they were back on the day I retired (May 1, 2007), along with me taking my entire income from my portfolio - of course with the income provided by the SPIA.

I'll admit that we're also doing well since DW is still employed four years later (not emotionally ready to retire) and she has not had to draw from her portfolio, along with contributing minor 401(k) contributions along the way. However, looking at my draw along with the downturn in the 2008/early 2009 period, we're looking quite good for the current time - and the future.

Annuities (specifically SPIA's)? Are they for you? I have no idea. You need to look at your own situation, your appetite for risk, and how the option may affect your retirement income plan. I will not say what you should/should not do. Everybody is different.

The only thing I will say is that while in my employment years, I had some ideas that other options would be "good enough" (such as CD's, bond ladders, and portfolio withdrawals - even Wellsley, which BTW, we both hold). Now that I'm retired, I understand that without a paycheck, I can't afford to be wrong. As I often said, "in retirement, cash flow is everything".

The SPIA (in our case) ensures our current income (without market consideratioins), and our needs, allowing us to both retire earlier than planned and delay our respective SS claims. That to us is good enough to be a prudent path to follow. As for others? Again, I say that each must make their own decision, with their own analysis of their specific situation. Just because the option worked for us (and after four years, has worked well) dosen't mean it will work for every situation. However, the point is that don't just disregard (or speak badly) of an option, without proper study of how it will affect your specific situation, rather than just make general comments based upon opinions...
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Old 05-27-2011, 08:48 AM   #6
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I think Prof. Milevsky's research on the subject is reasonably convincing. But I think that SPIAs are best purchased at older ages (60s or even 70s) to cut off the tail of longevity risk, so they have limited applicability for us yunguns. And SPIAs come with their own risks, most notably inflation and carrier risk.

I am interested to watch the development of the longevity insurance market, which may be an attractive, relatively inexpensive way to hedge longevity risk. Time will tell, and I would be extremely picky about the carrier.

I am also a lot more interested in vesting in a pension since reading Milevsky's work. My employer allows retirees in active payout to purchase extra pension credit with 401k funds. If this option is still open when I am ready, it could be an extremely valuable benefit and worth putting up with a few more years of nonsense.
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Old 05-27-2011, 09:15 AM   #7
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If people do not have a bequeath motive, and if one believes Firecalc calculations will be representative of the future, I do not understand why most people would not place at least half of their nest egg in an annuity. Let's do the numbers to compare apples with apples:
65 year old man with $1,000,000 to invest in an annuity or balanced portfolio:

He buys a 25 year term annuity that will pay him a virtually risk free income of $66,000 per year for 25 years, or,
He invests in a 50/50 portfolio with a 1% expense ratio. He begins by taking out $35,000 per year and increases it by a 3% inflation factor each year for 25 years. According to Firecalc, at the end of 25 years he has $891,949 left on average, with a 99.1% chance of obtaining his goal. BUT, it will take him over 21 years before he can take $66,000 per year. If he decided to take a noncola $66,000 from his portfolio, he'd only have a 67% chance of it surviving 25 years.

We can pick other examples besides the above and we will get similar results. Psychologically, the annuity holder does not need to worry about the stock market. This psychological difference makes a world of difference in our happiness and outlook on life (especially for the risk averse). If you lose a great deal of your money (e.g., 2008) and are withdrawing money for living expenses, you must either reduce your lifestyle, die, or go bankrupt.
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Old 05-27-2011, 09:22 AM   #8
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Psychologically, the annuity holder does not need to worry about the stock market. This psychological difference makes a world of difference in our happiness and outlook on life (especially for the risk averse).
Instead, they can worry about inflation, insurer risk, and limited state coverage should the insurer default - which does zero for my happiness and outlook on life, especially since the decision to give my money to an insurance company buy the annuity is irrevocable.
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Old 05-27-2011, 09:25 AM   #9
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I am also a lot more interested in vesting in a pension since reading Milevsky's work. My employer allows retirees in active payout to purchase extra pension credit with 401k funds. If this option is still open when I am ready, it could be an extremely valuable benefit and worth putting up with a few more years of nonsense.
What is the difference between purchasing extra pension credit with 401K funds vs. annuitizing funds your 401K in a SPIA? Is it just a better deal in terms of bang for your buck?

Thanks.
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Old 05-27-2011, 09:38 AM   #10
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Instead, they can worry about inflation, insurer risk, and limited state coverage should the insurer default - which does zero for my happiness and outlook on life, especially since the decision to give my money to an insurance company buy the annuity is irrevocable.
First, the annuity holder is better off b/c he starts the 25 year period withdrawing almost twice the balanced investor ($66,000 vs $35,000). This diminishes over time. I think most would rather have $66,000 noncola than $35,000 cola when it takes 21 years (i.e., age 86 in my example) to overtake the annuity holder.

Second, there are very few cases in our history of an immediate annuity holder not being made whole. In the extremely few cases where this is not so, the haircut has been less than 10%. Many states have increased their guarantee to $250,000. By buying from different companies, this risk goes away.

Even though the rationale is there, most people will not want to give up control of their money even though they probably should with a portion of it.
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Old 05-27-2011, 10:05 AM   #11
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If people do not have a bequeath motive, and if one believes Firecalc calculations will be representative of the future, I do not understand why most people would not place at least half of their nest egg in an annuity. Let's do the numbers to compare apples with apples:
65 year old man with $1,000,000 to invest in an annuity or balanced portfolio:

He buys a 25 year term annuity that will pay him a virtually risk free income of $66,000 per year for 25 years, or,
He invests in a 50/50 portfolio with a 1% expense ratio. He begins by taking out $35,000 per year and increases it by a 3% inflation factor each year for 25 years. According to Firecalc, at the end of 25 years he has $891,949 left on average, with a 99.1% chance of obtaining his goal. BUT, it will take him over 21 years before he can take $66,000 per year. If he decided to take a noncola $66,000 from his portfolio, he'd only have a 67% chance of it surviving 25 years.

We can pick other examples besides the above and we will get similar results. Psychologically, the annuity holder does not need to worry about the stock market. This psychological difference makes a world of difference in our happiness and outlook on life (especially for the risk averse). If you lose a great deal of your money (e.g., 2008) and are withdrawing money for living expenses, you must either reduce your lifestyle, die, or go bankrupt.
Do you calculate the "half" as half of your investment in stocks and bonds, or half of you're total retirement resources including SS and pension?
I think if you use the second approach you'll find that lots of people already have half their resources in annuities.
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Old 05-27-2011, 10:11 AM   #12
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When I started on this board, their was lots of confusion about "annuity". Many people automatically thought of SPDAs that were sold strictly as CD or mutual fund alternatives. Others thought of Equity Indexed Annuities. Those were almost universally ridiculed.

It's progress just to get to the point that many posters know what an SPIA is, and are able to discuss pros and cons without getting confused by other "annuities".

I also assume that the economic reversals of the last 2-3 years have something to do with the interest in guarantees of any sort.
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Old 05-27-2011, 10:17 AM   #13
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What is the difference between purchasing extra pension credit with 401K funds vs. annuitizing funds your 401K in a SPIA? Is it just a better deal in terms of bang for your buck?

Thanks.

It is economically similar, depending on how my purchase option is priced. There is also no carrier risk in the case of my pension purchase option.
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Old 05-27-2011, 10:25 AM   #14
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Do you calculate the "half" as half of your investment in stocks and bonds, or half of you're total retirement resources including SS and pension?
I think if you use the second approach you'll find that lots of people already have half their resources in annuities.
Good point! I would certainly want to be able to cover my basic expenses, including home carrying costs, car expenses, groceries, health insurance, and utilities with guaranteed income (i.e., ss, pension, or annuity (an/or individual bonds for those who want to take a little more risk).
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Old 05-27-2011, 11:12 AM   #15
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Even though the rationale is there, most people will not want to give up control of their money...
... especially to an insurance company. You wouldn't happen to work for one by any chance?
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Old 05-27-2011, 11:28 AM   #16
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... especially to an insurance company. You wouldn't happen to work for one by any chance?
Nope--I am a finance professor.
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Old 05-27-2011, 01:24 PM   #17
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When I started on this board, their was lots of confusion about "annuity". Many people automatically thought of SPDAs that were sold strictly as CD or mutual fund alternatives. Others thought of Equity Indexed Annuities. Those were almost universally ridiculed.

It's progress just to get to the point that many posters know what an SPIA is, and are able to discuss pros and cons without getting confused by other "annuities".

I also assume that the economic reversals of the last 2-3 years have something to do with the interest in guarantees of any sort.
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.
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Old 05-27-2011, 01:58 PM   #18
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If people do not have a bequeath motive, and if one believes Firecalc calculations will be representative of the future, I do not understand why most people would not place at least half of their nest egg in an annuity. Let's do the numbers to compare apples with apples:
65 year old man with $1,000,000 to invest in an annuity or balanced portfolio:

He buys a 25 year term annuity that will pay him a virtually risk free income of $66,000 per year for 25 years, or,
He invests in a 50/50 portfolio with a 1% expense ratio. He begins by taking out $35,000 per year and increases it by a 3% inflation factor each year for 25 years. According to Firecalc, at the end of 25 years he has $891,949 left on average, with a 99.1% chance of obtaining his goal. BUT, it will take him over 21 years before he can take $66,000 per year. If he decided to take a noncola $66,000 from his portfolio, he'd only have a 67% chance of it surviving 25 years.
I think you made some rather unfavorable changes to FIRECalc. If we use the default portfolio values 75/25% and expense ratios. I get 100% chance of surviving 25 years with a COLA 35,000 withdrawal. I get a 91.4% success rate taking out $66,000 with no adjustments for 25 years and 76.6% chance for 30 years. The actual expenses for VTI is .07 and for BND is .11 and the Admiral versions of the funds are similar. Using the true ER and 50/50 portfolio I get 88% chance for survival, or as Vanguard says."Expenses matter".
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Old 05-27-2011, 02:11 PM   #19
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Good point! I would certainly want to be able to cover my basic expenses, including home carrying costs, car expenses, groceries, health insurance, and utilities with guaranteed income (i.e., ss, pension, or annuity (an/or individual bonds for those who want to take a little more risk).
Yep. I had a co-worker who promoted splitting expenses into "basic" and "flexible". His attitude was you should have nearly 100% probability of covering basic. It makes a lot of sense to fund the basics with SS, pension, annuity, or very conservative investments. "Flexible" can be funded from higher volatility sources because, well, they're flexible.

Once we crossed off mortgage payments, children's expenses, FICA, and some FIT, we found that our "continue lifestyle" expenses in retirement would be about 50% of what we were spending when we had all that stuff. Simply deferring SS covers all those expenses for us. Of course "deferring SS" is equivalent to "buying an annuity from Uncle Sam", and was probably included in your first post.
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Old 05-27-2011, 03:27 PM   #20
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I think you made some rather unfavorable changes to FIRECalc. If we use the default portfolio values 75/25% and expense ratios. I get 100% chance of surviving 25 years with a COLA 35,000 withdrawal. I get a 91.4% success rate taking out $66,000 with no adjustments for 25 years and 76.6% chance for 30 years. The actual expenses for VTI is .07 and for BND is .11 and the Admiral versions of the funds are similar. Using the true ER and 50/50 portfolio I get 88% chance for survival, or as Vanguard says."Expenses matter".
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.
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