SPIAs and Market Corrections.

[Independent]

The video is about deferred annuities, this thread is about immediate annuities.

They are different animals.

 

[NW-Bound]

... People often say that SS is their retirement annuity so for us ERs is there an argument for an SPIA to cover the years between ER and taking SS?

I have not put myself in the shoes of the youngster ERs to see from their viewpoint. But for me, with SS just a few years away, and myself sleeping on a lumpy mattress (36% cash), I see no need for any SPIA.

 

[aja8888]

I have not put myself in the shoes of the youngster ERs to see from their viewpoint. But for me, with SS just a few years away, and myself sleeping on a lumpy mattress (36% cash), I see no need for any SPIA.

One of the big issues with giving up a very large pile of cash to an annuity company after age 70, like a lot of folks here think is the best time to do that, is that many folks over 70 are encountering health issues and don't necessarily see a long life ahead of them.

With that perspective, oldsters tend to keep the "stash" very available and easily used for a multitude of purposes with variable timing and no set amount to spend/gift/invest. Also, SS (if you receive it) is the annuity of choice. It is for us (both early 70's) and we like the flexibility of having ready stash cash.

 

[fritz]

Although market gyrations are a great fear-induced sales tool for annuity salespersons, I'm no more prone to buy an annuity today than I was a week ago, a year ago or a decade ago.

+1 exactly!!

 

[misanman]

I think at some point we will likely purchase a SPIA.

 

[dtbach]

with a military pension and SS in a couple of years, I see no good reason to buy a SPIA.

 

[nun]

with a military pension and SS in a couple of years, I see no good reason to buy a SPIA.

I agree. I have a state pension and SS as well as my TIAA-Traditional so all my income needs are covered by things other than market investments so I won't be buying an SPIA either. But would those of us who have pensions swap them for an equivalent amount invested in the markets. People with pensions generally seem glad of them, but few people seem to want to buy SPIAs. Is it just that commercially available SPIAs aren't good value when compared with the small number of workplace pensions still left or military pensions?

 

[nun]

I have not put myself in the shoes of the youngster ERs to see from their viewpoint. But for me, with SS just a few years away, and myself sleeping on a lumpy mattress (36% cash), I see no need for any SPIA.

Wouldn't using some of that cash to buy an SPIA be better than leaving it in the mattress?

 

[nun]

The video is about deferred annuities, this thread is about immediate annuities.

They are different animals.

Yes I agree....the video makes no distinction between types of annuities and the circumstance when they might be purchased. I'd always avoid variable annuities though.

 

[W2R]

We all have our own individual investing styles and philosophies, but I'd be interested to learn if the recent market correction has made anyone think about adding an SPIA

That little blip? It didn't even make me think about leaning on cash next year, much less running out to buy an annuity any time in the next 15 years.

True, it's not over until it's over. But so far I haven't lost any sleep over it and I am just watching to see how this plays out. I do have a tiny pension, SS, the TSP "G Fund", and plenty of cash, so maybe that is why I am able to remain calm about it. But, as my late mother would have said, "That is not by accident, you know!"

The Dow is doing better today, and today does not seem wildly different from values during last August. I'm inclined to stick with my written plan and asset allocation for now.

 

[NW-Bound]

Wouldn't using some of that cash to buy an SPIA be better than leaving it in the mattress?

It's not strictly mattress money, but I-Bonds, stable value funds in 401k, etc... hence earning a bitty bit. In normal times, that money should be in bonds, but I do not trust the bond market right now. Risk/reward ratio is not to my liking.

The above said, I am sitting on real cash from reducing from 70% stock AA down to 60% AA just a few weeks ago. Do not know what to do with that money yet, but it may go back into stock if the market tanks. I normally run 70% stock AA and did go as high as 80%, or as low as 50%, if memory serves. Need to consult my diary.

 

[nun]

It's not strictly mattress money, but I-Bonds, stable value funds in 401k, etc... hence earning a bitty bit. In normal times, that money should be in bonds, but I do not trust the bond market right now. Risk/reward ratio is not to my liking.

The above said, I am sitting on real cash from reducing from 70% stock AA down to 60% AA just a few weeks ago. Do not know what to do with that money yet, but it may go back into stock if the market tanks. I normally run 70% stock AA and did go as high as 80%, or as low as 50%, if memory serves. Need to consult my diary.

I'm now using TIAA-Traditional as my "stable value" fund. I treat it like a 10 year CD. I can get at the money over a period of 10 years in 10 equal installments and it's returning 4.5% with a guaranteed minimum of 3%. That's roughly 18% of my portfolio, 22% is in bonds in Wellesley and Total Bond market and 60% is in equity indexes.

 

[Ready]

Perhaps some day in the distant future, if interest rates should every skyrocket to double digits, I would consider a SPIA. But I would never buy one from a salesperson. I would call Vanguard and see what their product offerings look like.

I'm not familiar with TIAA's product, but it is highly unlikely that in this ultra low interest rate environment they could offer anything that would make sense to lock your money up over.

 

[haha]

I think of an SPIA as a bond ladder that you can't outlive.
So, it's not a replacement for equities.

It also has little in common with a bond ladder. The key advantage of a bond ladder is periodic turnover, which allows one to take advantage of a steep interest curve, and to roll over to higher rates if interest rates are trending up. Don't know what is the current ER.org consensus regarding direction of rates and expected shape of curve. It doesn't really matter, because so far ER.org consensus doesn't have a real good batting average on rates or curve shape . As I see it, a fixed annuity is a flat bet on steady or lower rates.

Currently Ray Dalio is expecting a head fake tightening, then more QE. Janet doesn't want us to think that she isn't bold after all.

Ha

 

[fritz]

I agree. I have a state pension and SS as well as my TIAA-Traditional so all my income needs are covered by things other than market investments so I won't be buying an SPIA either. But would those of us who have pensions swap them for an equivalent amount invested in the markets. People with pensions generally seem glad of them, but few people seem to want to buy SPIAs. Is it just that commercially available SPIAs aren't good value when compared with the small number of workplace pensions still left or military pensions?

Although I don't see a need for an annuity for myself - I find SPIAs an acceptable option for those looking to lock in an income stream when they fear they will run out of funds (no other good reason IMHO). Inflation would be the Achilles' heal, but assume it's the lessor of two evils compared to the present fear of depleting your income stream (perceived desperate times call for desperate measures). It becomes a more palatable option the older one gets, and higher SPIA income streams are offered.

I find it interesting that they are suggested for those looking to increase their available income (over regular investments) or to take more risk in equities. That would increase the sales of SPIA annuities for annuity salespeople, but question the strategy. Aren't those normally looking to use them usually risk averse, or (as mentioned in the previous paragraph) afraid of outliving their income stream? Kind of like taking higher equity risk in an effort to increase potential retirement income, when in reality preserving retirement income should be the goal when currently having adequate funds is questionable (and time is no longer on your side)....

As for Pensions vs. annuities - there's a simple answer to your question of why people are more accepting of pensions. Pensions are something you are "given" (not chosen), and annuities are something you buy (choose).

People are glad to have pensions if they are adequate enough to cover their retirement income needs (and maybe lack adequate investments for a comfortable retirement w/o it). One should consider themselves fortunate to have a government/corporate pension - doubt they would consider trading places with those thrown under the bus in the "new 401K corporate world" who have to make it on their own with little to no guidance and no fall back pensions.

Some pensions are not the best and I had a small one that I gladly traded for a basket of self-chosen investments. I felt that I could more than double the lump sum payout (had the time) and exceed the offered income stream - and still have the principal to pass on to heirs. Most people also state they would gladly have taken their SS withholding and invested it themselves over their lifetime vs. letting the government provide them with an annuity (AKA SS).

 

[Onward]

Here's another one that specifically mentions SPIAs.

 

[hnzw_rui]

I agree. I have a state pension and SS as well as my TIAA-Traditional so all my income needs are covered by things other than market investments so I won't be buying an SPIA either. But would those of us who have pensions swap them for an equivalent amount invested in the markets. People with pensions generally seem glad of them, but few people seem to want to buy SPIAs. Is it just that commercially available SPIAs aren't good value when compared with the small number of workplace pensions still left or military pensions?

In fairness, most government pensions probably have COLA - something that would be quite expensive if you buy an SPIA so the pension is already hedged for inflation.

Also, consider mortality rates and profit. Insurance companies need to make a profit and most folks who buy SPIAs are expecting themselves to be longer lived. Meanwhile, pension systems can use the "profit" made by the insurance companies to pay for higher benefits (albeit benefits are unsustainably high for some).

I found the following quick stats for our retirement system:

Ave. retirement age: 60
Ave. age of retirees receiving pension: 70
Ave. age of beneficiaries receiving pension: 75

So basically, on average the retirement system only pays 10 years of benefits before the employee croaks. Default spousal continuance is at 50%. A co-worker told me that in a retirement seminar he attended years back, the lecturer mentioned retirees died around 5 years into retirement on average.

For simplicity, let's assume the employee is single. From http://www.immediateannuities.com, an SPIA that pays $40K a year at age 60 costs $665K for a male and $691K for a female. Even with a 3% COLA, that $665K would have been more than enough to cover the $40K + COLA paid out for 10 years even at 0% interest rate and still have money left over.

Another thing, the retirement systems for a lot of non-federal government employees are in-lieu of Social Security. Instead of contributing 6.2% into SS, employees pay a percentage of their salary to their retirement system so if the employee didn't work at an SS job for at least 10 years and just took the lump sum instead of annuity pension, there's no fallback on SS in case the market tanks. Besides, since the lump sum option is usually just a return of contributions plus a small interest based on treasuries, it's generally a no-brainer to take the annuity.

Mind, our employee contributions are 10%. Assuming $50K starting salary adjusted yearly for inflation, backtesting using http://www.portfoliovisualizer.com of the Coffee House Portfolio for the period of 1979-2008 (30 years) shows an ending portfolio balance of $1.2M (for employee only contributions). Final salary is $150K and pension is $90K (60%). That's a fairly generous 7.5% WR. Of course, if you had retired in 2007, portfolio is at $1.5M. Still, that's a pretty high 6% WR. Granted, if you assume a 6.2% employer match in addition to the employee contribution, that's a portfolio balance of $1.9M in 2008 with a high of $2.4M in 2007.

 

[nun]

Here's another one that specifically mentions SPIAs.

I think everyone here knows the contents of the video and would buy an SPIA as insurance against living a long time or the possibility of a significant and prolonged market correction early in the drawdown phase. They should also only use a portion of their portfolio. Having as base of income that does not depend on the markets is good planning IMHO. SPIAs are not great value as even if you lived forever your implied investment return will never be greater than the payout rate, but if you don't have a pension or enough SS they might be considered and thought of as insurance rather than an investment

 

[samclem]

Emphasis added:

I think everyone here knows the contents of the video and would buy an SPIA as insurance against living a long time or the possibility of a significant and prolonged market correction early in the drawdown phase.

I don't think everyone here would agree with that. An SPIA bought to protect against sequence of returns risk early in retirement will be very expensive due to the meager mortality credits for a younger person. If worried about the risk of poor stock market performance in the first years of retirement, I'd recommend that a retiree (especially an ER) start with a higher allocation to cash, a CD ladder, or a bond ladder to cover the first 5-10 years of expenses rather than use an SPIA for this purpose. They can then re-allocate to a higher % in equities gradually later once they are are out of the woods.

 

[Midpack]

I think everyone here knows the contents of the video and would buy an SPIA as insurance against living a long time or the possibility of a significant and prolonged market correction early in the drawdown phase. They should also only use a portion of their portfolio. Having as base of income that does not depend on the markets is good planning IMHO. SPIAs are not great value as even if you lived forever your implied investment return will never be greater than the payout rate, but if you don't have a pension or enough SS they might be considered and thought of as insurance rather than an investment

You love SPIA's, that's fine. But your conclusion doesn't seem to jive with your poll at all!

If I buy a SPIA it won't be until I am near 80 yo, and I certainly wouldn't buy one today (even if I was 80) if I could avoid it with interest rates/yields at historic lows. Very high price for floor income via SPIA's right now. YMMV

 

[fritz]

I think everyone here knows the contents of the video and would buy an SPIA as insurance against living a long time or the possibility of a significant and prolonged market correction early in the drawdown phase. They should also only use a portion of their portfolio. Having as base of income that does not depend on the markets is good planning IMHO. SPIAs are not great value as even if you lived forever your implied investment return will never be greater than the payout rate, but if you don't have a pension or enough SS they might be considered and thought of as insurance rather than an investment

I disagree also - I mentioned the only value I see for SPIA annuities was to allay the perceived fear of depleting one's income stream before leaving. The longer you can wait - the more attractive the income stream, but then there's that other factor...

IMHO - when you enter into an annuity contract, the insurance company justifies it's underwhelming payout by telling you you're insuring your income stream for living a long time. All you have to do is divide the initial cost of the SPIA by the annual payout to estimate your departure they have targeted for you. That is also how long it will take you just to get your own money back.

Not too many would advise putting all of one's investments into an annuity. The majority of people "already" have more than enough income stream coming from an annuity - it's called Social Security. And as bad as most people think SS is - it still pays out better than anything one can buy.

 

[Independent]

Here's another one that specifically mentions SPIAs.

The title "Why Annuities are Like Heroin" should clue you in that you're not getting a balanced review of where SPIAs might be useful.

Nobody here is going to suggest that people put 100% of their savings in non-COLA'd SPIAs. We all understand inflation and know how SWRs were developed.

The video's primary complaint about SPIAs (as close as I can tell) is that most are not inflation protected. But, the speaker has no problem with people putting 40% of their assets in non-COLA'd bonds. If I buy a 20 year bond today with a 3.5% coupon, I'm locking in 3.5% of my original purchase price for 20 years, with no inflation protection. And, I'll eventually get my purchase price back without any inflation adjustment.

He did not consider a portfolio that might be 60/40, where the 40 is split equally between bonds and a SPIA. He did not consider buying a CPI indexed SPIA. He did not discuss the insurance characteristics of a SPIA, or a deferred, zero-cash value annuity (aka longevity insurance). He didn't talk about the difference between buying at 60 vs. buying at 80.
All of those ideas get discussed here.

 

[Independent]

I found the following quick stats for our retirement system:

Ave. retirement age: 60
Ave. age of retirees receiving pension: 70
Ave. age of beneficiaries receiving pension: 75

So basically, on average the retirement system only pays 10 years of benefits before the employee croaks. Default spousal continuance is at 50%. A co-worker told me that in a retirement seminar he attended years back, the lecturer mentioned retirees died around 5 years into retirement on average.

I think you've got a math error here.

Suppose everybody retired at 60 and everybody died at 80. If the number of retirees per year is constant, then the "average age of retirees receiving pensions" is 70. But, clearly everybody gets 20 years of benefits before they "croak".

But, of course, mortality isn't that predictable. SPIAs are purchased by people who want to be prepared for the possibility of a very long life.

 

[fritz]

The title "Why Annuities are Like Heroin" should clue you in that you're not getting a balanced review of where SPIAs might be useful.

Nobody here is going to suggest that people put 100% of their savings in non-COLA'd SPIAs. We all understand inflation and know how SWRs were developed.

The video's primary complaint about SPIAs (as close as I can tell) is that most are not inflation protected. But, the speaker has no problem with people putting 40% of their assets in non-COLA'd bonds. If I buy a 20 year bond today with a 3.5% coupon, I'm locking in 3.5% of my original purchase price for 20 years, with no inflation protection. And, I'll eventually get my purchase price back without any inflation adjustment.

He did not consider a portfolio that might be 60/40, where the 40 is split equally between bonds and a SPIA. He did not consider buying a CPI indexed SPIA. He did not discuss the insurance characteristics of a SPIA, or a deferred, zero-cash value annuity (aka longevity insurance). He didn't talk about the difference between buying at 60 vs. buying at 80.
All of those ideas get discussed here.

Well, according to the poll results - you won't get too many takers here for your wonderful suggestions for other SPIA uses.

 

[samclem]

Well, according to the poll results - you won't get too many takers here for your wonderful suggestions for other SPIA uses.

Well, to be fair, that's hard to discern from the way the poll is worded. 99% of the people here might be planning to buy an SPIA and the poll results could be just as they are now, provided the people didn't make their decision to buy them based on the recent market blip.
I would consider buying one in the same circumstances you and others have mentioned-- an in extremis case where it looks likely my portfolio might not see us to the end of the line, and an SPIA looks like the best of a series of bad options.

Independent's "wonderful suggestions" could also be useful, for people in the right set of circumstances.