SPIAs: Terrible investments, ok insurance....discuss

[ziggy29]

An SPIA is basically like buying longevity insurance, but with interest rates this bad it comes at a prohibitively high price. Agree that it's not really an investment. For someone with a lot of personal retirement savings and no DB pension who would like to replicate a "three-legged stool" approach to retirement income it can make sense, especially if they are healthy and have a family history of longevity.

 

[Independent]

I see a traditional SPIA as a combination of an investment and longevity insurance.

I think one way of explaining that is to note that I can mimic an SPIA with a pure investment and a deferred annuity.

1) Put part of the money I was going to spend on the SPIA into a deferred annuity that doesn't have surrender values. Let's say it starts paying 20 years from now, because I noted that I've got less than a 50% chance of still being alive then. So this annuity will pay only if I need income for an "unusually long" life.

2) Put the rest of the money I was going to spend on the SPIA into a bond ladder that provides guaranteed coupons and maturities that match the SPIA payout over the next 20 years.

In this example, (1) is the insurance, (2) is the investment.

Note that these dollars won't perfectly match. The SPIA probably has higher expense loads than a bond ladder. But, the bond ladder will continue to pay for 7 years if I die at 13 years (for example). I'm not sure which "wins" in terms of monthly payout, but I think they will be close enough to support the claim in the first sentence.

 

[audreyh1]

We are living only on investments - no pension, no SS. I hadn't considered an SPIA for us, as we are quite comfortable with market volatility and have plenty in short-term investments to help us over rough spots. I was planning to educate myself on SPIAs and other options as I got older - just in case I felt like the complexity of managing a portfolio might be too much of a burden on my elderly self.

But a 12 years older friend has made me evaluate them from a different point of view - recently widowed, very risk averse, does have SS covering 3/4 of expenses, probably could get away with just annuitizing (with cash refund) 1/4 of her assets to cover base expenses, and then maybe she'll be more comfortable with the market volatility of the remaining funds invested.

 

[Texas Proud]

We are living only on investments - no pension, no SS. I hadn't considered an SPIA for us, as we are quite comfortable with market volatility and have plenty in short-term investments to help us over rough spots. I was planning to educate myself on SPIAs and other options as I got older - just in case I felt like the complexity of managing a portfolio might be too much of a burden on my elderly self.

But a 12 years older friend has made me evaluate them from a different point of view - recently widowed, very risk averse, does have SS covering 3/4 of expenses, probably could get away with just annuitizing (with cash refund) 1/4 of her assets to cover base expenses, and then maybe she'll be more comfortable with the market volatility of the remaining funds invested.

This is the crux of the issue.... how comfortable are you in the market...

If you have an 'income stream' (ie, pension, SPIA or whatever) that covers your expenses then whatever the market does is background noise.... this is where my mom and my oldest sister are... they have investments but really do not care that much about them... they are there in case they have to go to a home or some other big ticket item... maybe once a year they take some money out for a big trip....


Now, if you do not have that income stream then you are subject to the market... if you are, then you have some kind of plan to live through any major market downturn or you start to worry about running out of money.... some people have so much that even if the market dropped 75% they would be OK... others would not...


So there IS a risk that can be removed with an SPIA.... the question is if the cost of that 'insurance' is worth the price.... if you are someone who worries all the time when the market goes down 10% then you probably should get rid of some or all of that risk.... if this last month or so did not bother you, then you are OK with not getting rid of that risk.... at least not at these prices...

 

[Options]

Since many of us are repeating ourselves...

No kidding. Discussion of The Great Annuity Debate...yet again... =

 

[youbet]

This is the crux of the issue.... how comfortable are you in the market........So there IS a risk that can be removed with an SPIA.... .

My problem is that I worry about inflation risk as much as market risk. I've been FIRE'd for almost a decade. I have many friends in the same situation since Mega laid us all off at about the same time.

Of the 3 guys who are struggling, none are struggling because of market performance. Despite the Great Recession, all have portfolios that have done OK vs their beginning values ten years ago. But all 3 say that their budgets have had to be increased by about one-third and that is killing them.

I'd hate to start an SPIA too early and have it fail to provide a satisfactory floor spending level (along with SS) because of even moderate inflation.

 

[Chuckanut]

probably could get away with just annuitizing (with cash refund) 1/4 of her assets to cover base expenses, and then maybe she'll be more comfortable with the market volatility of the remaining funds invested.

+1

If such an annuity can keep a person from panicking in a down market and selling at a steep loss, and help them sleep better at night, it could be a good idea in the long run. Like when to take SS, it's an individual issue.

 

[Options]

My problem is that I worry about inflation risk as much as market risk. I've been FIRE'd for almost a decade. I have many friends in the same situation since Mega laid us all off at about the same time.

Of the 3 guys who are struggling, none are struggling because of market performance. Despite the Great Recession, all have portfolios that have done OK vs their beginning values ten years ago. But all 3 say that their budgets have had to be increased by about one-third and that is killing them.

I'd hate to start an SPIA too early and have it fail to provide a satisfactory floor spending level (along with SS) because of even moderate inflation.

I am beginning to think more and more along the lines that in investing, there is no one right answer for everyone. Your story shows why this is true. And this is what can make the topic of investing quite confusing, with so many opinions, so many options, etc., IMO.

One of my (many) projects last year after retiring was investigating the appropriateness of annuities for my personal PF (versus that of anyone/everyone else). I looked deeply into QLAC's due to the recent change in their tax treatment. What I found (to my surprise) was that I had inadvertently engaged in a sort of LMP by delaying SS while having other assets, and also having ample funds to cover the decade between 60-70. Thus, for my situation an annuity, even a QLAC, at this time isn't optimal. It may be later, if circumstances change

There are too many publications stating delaying SS is the best annuity due to the calculations involved. Too many other publications point out that for people who haven't saved enough, annuities may be their only way of having a sustainable retirement. There are many other opinions that delaying/laddering annuities is best done after 70, or 75, or 80. And no, annuities are not investments, they're insurance. Other people can't cough up the commissions involved.

There are many on this board who purchased annuities before, upon, or after retirement who are satisfied with them. Research has shown a correlation between having sources of fixed income (pensions, annuities, etc.) and retirement happiness. Still, an annuity may not be right in your situation. You have to take the time, look at your own asset make-up, your own investing temperament, attitude towards risk (the stock market is risky. period.), evaluation of the extent to which you think you're the smartest investing guy/gal in the room (seriously!), comfort with paying commissions, fees., etc., estimation of your longevity, legacy desires, current and future estimated health status, and come to some kind of decision.

In my case, chances are good that I have over saved; thus, I have more options.

 

[audreyh1]

My problem is that I worry about inflation risk as much as market risk. I've been FIRE'd for almost a decade. I have many friends in the same situation since Mega laid us all off at about the same time.

Of the 3 guys who are struggling, none are struggling because of market performance. Despite the Great Recession, all have portfolios that have done OK vs their beginning values ten years ago. But all 3 say that their budgets have had to be increased by about one-third and that is killing them.

I'd hate to start an SPIA too early and have it fail to provide a satisfactory floor spending level (along with SS) because of even moderate inflation.

Most of us rely on only a portion of our retirement portfolio to provide an inflation hedge. Fixed income won't do it. I'm thinking that with 3/4 of my friend's savings in investments that have some equity exposure, she still has some inflation protection, plus the SS that is covering 3/4 of her expenses is COLA. In say 5 or 10 years, she would have the option of laddering another, probably much smaller, SPIA to make up for the inflation loss and it would take less anyway because she would be that much older. This is someone who will be 70 in a couple of years.

 

[nun]

I've been pondering this more. I believe in the 3 legged stool approach to retirement. One leg is investments, one leg is pensions/annuities, and the third leg is SS.

SPIAs do not make sense if you have guaranteed pensions - since they are basically turning cash into a pensions. They do make sense if you don't have pensions or have small pensions.

Like a 3 legged stool - it's good to have all 3 legs fairly equal in length. If you have a pension that covers most of your expenses - SPIAs don't make any sense at all.

Could not agree with you more!

Over the last 30 years the mutual fund retirement industry has done a pretty good job of side lining annuities and the insurance companies have shot themselves in the foot rather by trying to keep up by producing products like variable annuities. Consequently people now hate annuities.....and with a lot of good reason.

In the UK a lifetime SPIA was once the default way to fund retirement. The law required that a certain percentage of your income (up to some threshold) come from an annuity. But, the laws were liberalized last year so that people can do whatever they want, just like in the USA, and last summer the bottom fell out of the UK annuity market and everyone retired on mutual fund portfolios....or rental properties. Now there's panic in the UK with the recent market declines.

I believe that most people are not sufficiently diversified if they have just SS and mutual funds/ETFs. That's two legs and the third would be something like a pension, annuity or maybe a paid off rental property.

 

[nun]

For anyone interested here are some numbers from my pension/annuity experiences.

I'm a 55 year old male and buying into my states pension plan with a lump sum of $282k.

These are my single lifetime SPIA quotes

TIAA - $14976 / year which is an IRR of 3.0 % based on a 28 year lifespan
The TIAA quote uses the 3% minimum guaranteed rate and the actual payment will be higher as it is calculated on the guaranteed rate plus a supplemental rate. Today that is 0.67% so the actual rate would be $3.67%

Immediate Annuities - $16080/year, IRR is 3.5%

MA state pension - $19650/year with 2% COLA, IRR is 7.3%

So as long as the state pension COLA is at least 2% a year (which it has been for the last 20 years) and I live to 83 it's as good as any stock portfolio projection.

 

[clifp]

I think SPIA are both insurance and investment. But in my case, the insurance is also Dementia insurance. At some point, I'll stop being an active investor and move much of my portfolio into index. But even with index funds, I (and much of the forum) have enough money that I'm probably a prime target for scam artist.

It is significantly harder for me to transfer an annuity to some fast talking salesman, or Nicole Smith type, than it is for them to get me to write a check.

So I'm in no hurry to get an SPIA, but I probably will sometime in my late 60s or early 70s.

 

[hurricane harry]

pension=check
457b=check
bonds=check
deferred annuity=check

sleeping very well at night


four legged stool, what could be better

 

[Dawg52]

I think SPIA are both insurance and investment. But in my case, the insurance is also Dementia insurance. At some point, I'll stop being an active investor and move much of my portfolio into index. But even with index funds, I (and much of the forum) have enough money that I'm probably a prime target for scam artist.

It is significantly harder for me to transfer an annuity to some fast talking salesman, or Nicole Smith type, than it is for them to get me to write a check.

So I'm in now hurry to get an SPIA, but I probably will sometime in my late 60s or early 70s.

My thoughts and plan as well.

 

[LARS]

This is the crux of the issue.... how comfortable are you in the market...

I disagree.

Comfort with volatility has little to do with the real world analysis.

You can be very comfortable with markets but if your time horizons are shorter, or we have a repeat of the 70's style markets for example, you run the risk of running out of time for the markets to comeback.



Sent from my iPad using Early Retirement Forum

 

[Texas Proud]

I disagree.

Comfort with volatility has little to do with the real world analysis.

You can be very comfortable with markets but if your time horizons are shorter, or we have a repeat of the 70's style markets for example, you run the risk of running out of time for the markets to comeback.



Sent from my iPad using Early Retirement Forum

But the person who invested in the markets know that is a risk... I am not talking about the results, just the decision on which way to go... since there is no way you can know the results, your decision is made on your comfort with the market....

 

[Texas Proud]

My problem is that I worry about inflation risk as much as market risk. I've been FIRE'd for almost a decade. I have many friends in the same situation since Mega laid us all off at about the same time.

Of the 3 guys who are struggling, none are struggling because of market performance. Despite the Great Recession, all have portfolios that have done OK vs their beginning values ten years ago. But all 3 say that their budgets have had to be increased by about one-third and that is killing them.

I'd hate to start an SPIA too early and have it fail to provide a satisfactory floor spending level (along with SS) because of even moderate inflation.

Yes, inflation risk is a valid risk... however, inflation has not been that much the last 3 years... there has to be something else going on that made their budgets go up so much besides inflation... that is where I would put the blame, not inflation...

 

[alaska55]

3 years, I would say the the 7 last years inflation has been fairly tame. Inflation has aveaged less than 1.7 since 2008. Sounds more like a spending problem or a planning problem.

Historical Inflation Rates: 1914-2016 | US Inflation Calculator

 

[alaska55]

I have a feeling inflation will be pretty tame for the foreseeable future as the world continue to become even more global.In a world of 2% inflation a spia doesn't look that bad. The million $ question are you willing to make that bet?

 

[nun]

But the person who invested in the markets know that is a risk... I am not talking about the results, just the decision on which way to go... since there is no way you can know the results, your decision is made on your comfort with the market....

But if we follow many of the retirement planners.....FireCalc included.....the risk of failure might be minimal given a set of reasonable historic assumptions. Are many less sophisticated retirees and investors too comfortable with the market?

 

[rodi]

But if we follow many of the retirement planners.....FireCalc included.....the risk of failure might be minimal given a set of reasonable historic assumptions. Are many less sophisticated retirees and investors too comfortable with the market?

Looking at your signature line:

Retired Mar 2014 at age 52
Target AA: 70% equity funds / 28% TIAA-Traditional/ 2% cash
Target WR: 0.0% Approx 100% SI (secure income), pension, SS, rent.

I'm curious why you are so interested in annuities? You have your floor covered with Pension, SS, and Rent... (I assume pension is the TIAA annuity). Why buy more insurance/annuity if your floor is covered?

 

[LARS]

But if we follow many of the retirement planners.....FireCalc included.....the risk of failure might be minimal given a set of reasonable historic assumptions. Are many less sophisticated retirees and investors too comfortable with the market?

Agreed.

Timing and TIME is everything with the markets. As your physical duration shortens, so does the time to recover losses. It is in this context that annuities can play a real role for some.


Sent from my iPad using Early Retirement Forum

 

[youbet]

Agreed.

Timing and TIME is everything with the markets. As your physical duration shortens, so does the time to recover losses. It is in this context that annuities can play a real role for some.


Sent from my iPad using Early Retirement Forum

You don't need to recover losses back to your all time high or even to your beginning portfolio value. You just need to be able to keep spending without running out of money until the grim reaper grasps the credit card from your hand.

 

[youbet]

Yes, inflation risk is a valid risk... however, inflation has not been that much the last 3 years... there has to be something else going on that made their budgets go up so much besides inflation... that is where I would put the blame, not inflation...

Which orifice did you pull the 3 years from TP? That's not the number I was using.

 

[youbet]

.In a world of 2% inflation a spia doesn't look that bad. The million $ question are you willing to make that bet?

That bad? How bad is bad in terms of having your resources reduced? Would you be OK with spending a modest 20% or 25% less after a decade?

I agree that at a 2% (consistent not average) level of inflation, a non-cola'd source of spending resource seems reasonable in terms of its buying power deflating over time. But at 3% or 4%? How about if the average inflation rate is low but front end loaded?

My pension is non-cola'd and I've looked at the impact of inflation a number of times. Planning on reduced spending is not agreeable to me, so my investment strategy and WR considers inflation. Happily, FireCalc takes inflation into account and helps us with all the pencil pushing.