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

Texas Proud said:
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...
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Note that an SPIA or pension is not the only way to eliminate market risk. Instead of buying an SPIA, I could put the same money into a bond ladder. That's what the insurance company is doing with the premiums, I can cut out the middle man.

If I'm worried about inflation risk, my bond ladder would be in TIPS.

I think the reason I'd buy an SPIA instead of bonds is because the SPIA deals with longevity risk, bonds don't. For me, it's not about market risk.
 
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nun said:
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?
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Sure, some investors might be too comfortable with the market... but history has shown it to be one of the best investments over time...

However, if I had lived through the 30s I think that my investment style would be different.... when I was young we were pretty poor... my mom and dad lived through the depression, born in 1917 and 1919.... my dad had dabbled with options before having all the kids and lost all his money... after we all came along he did not have money to invest.... when we got older and mom started to work and they started to save, he was big into CDs.... but the interest rate was pretty high... he never owned stock the rest of his life... when he died it took me awhile to get mom to invest in stocks... but she finally did... she bought $4K of Exxon way back when that is now valued at $170K with reinvested dividends...


I think that we have much more data on investing and many more options to invest than our parents ever had... and the data seems to indicate that the market is the best place for the average joe....
 
I have another use for a SPIA. I intend to replace alimony I pay to my Xwife with one. This alimony is paid until she dies, by my estate if necessary. I would like to finally and completely remove her from my life so will buy her an annuity that pays an equal after tax amount as the alimony. I will also be ahead because annuity payout rates for a 65-70 female are higher than the dividend yield on the equities I will sell to fund the annuity. Maybe even higher than the total return would be. In any event it will be worth it as it will reduce my risk and allow me to stop paying every month. Not to mention the untenable position of having my second wife pay her alimony from my estate.

I already have a generous pension so would not likely consider an annuity other than for this specific reason.
 
Danmar said:
I have another use for a SPIA. I intend to replace alimony I pay to my Xwife. I would like to finally and completely remove her from my life so will buy her an annuity that pays an equal after tax amount as the alimony. I will also be ahead because annuity payout rates for a 65-70 female are higher than the dividend yield on the equities I will sell to fund the annuity.
Click to expand...


Funny, I’d of thought investing in a hit man over an SPIA the more compelling financial alternative! 🤔 (I joke of course.)


Sent from my iPad using Early Retirement Forum
 
Danmar said:
I will also be ahead because annuity payout rates for a 65-70 female are higher than the dividend yield on the equities I will sell to fund the annuity...
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Have you considered having a lump sum settlement discussion once you have quotes (maybe through a 3rd party)? You might get a better deal and avoid enriching the insurance company? Split the difference and you end up ahead.
 
kcowan said:
Have you considered having a lump sum settlement discussion once you have quotes (maybe through a 3rd party)? You might get a better deal and avoid enriching the insurance company? Split the difference and you end up ahead.
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That might be a good alternative except the X is still bitter and unreasonable (only been 25 years!). Also I would be worried she would burn through the lump sum then come back for more. There are plenty of cases where this has happened and the courts have awarded more. The choice of comparable annuity and how to determine it, was written into the final agreement so she cannot refuse it.
 
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Danmar said:
I already have a generous pension so would not likely consider an annuity other than for this specific reason.
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she didn't get a piece of that? normally those get divided
 
Agree with Harry.... sounds like it would be unfavorable to get her off your back by buying her an annuity. You might be able to buy an an annuity and have the benefits assigned to her (paid to her) and therefore the benefits paid would be tax deductible for you. Or worst cash have the benefits sent to your bank and then have a corresponding autopay to her so you can get the tax deduction (offset by interest income from the annuity). YMMV.
 
hurricane harry said:
since alimony is tax deductible and a lump sum payment is not, how is the annuity handled in the divorce?
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I believe Danmar is Canadian. I don't think US tax codes apply.
 
hurricane harry said:
since alimony is tax deductible and a lump sum payment is not, how is the annuity handled in the divorce?
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Yes, alimony is fully taxed and deductible in Canada while lump sums are not, so I equate the after tax amounts she receives. Eg if she gets $1,000 after tax now (I wish), I buy an annuity that pays her the same after tax amount. In Canada there is a prescribed amount of an unregistered annuity that is taxed. For a female that is 70 years old about 10% of her annuity would taxed.

I had the foresight of including this option in our final agreement as I didn't want this monkey on my back and potentially my current wife's back. X wife's mother is still alive and very healthy at 96!!
 
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Danmar said:
I didn't join the pension plan until after we separated. See got some of my CPP (like SS) but that was immaterial compared to my company pension.
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Mine got 46% of the company pension but her lawyer missed her share of CPP and Airline Frequent Flyer points. It was 100% joint survivor so if I outlive her, I can afford LTC!
 
kcowan said:
Mine got 46% of the company pension but her lawyer missed her share of CPP and Airline Frequent Flyer points. It was 100% joint survivor so if I outlive her, I can afford LTC!
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That's interesting. So if you outlive her, the 46% comes back to you? The CPP ends up getting shared for the years a couple is together. My X worked for some of those years so the effect wasn't that much. I think total effect for me is only a couple hundred dollars a month. As far as frequent flier points go, they tried to get half of mine but on the fate of separation I didn't have hardly any. Talk about petty!
 
Danmar said:
That's interesting. So if you outlive her, the 46% comes back to you?..........
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This just happened to a friend of mine - his ex died and her piece of his pension reverted back to him.
 
travelover said:
This just happened to a friend of mine - his ex died and her piece of his pension reverted back to him.
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in a plan subject to ERISA, once the pension has commenced the annuity is generally divided based on the original payment form. this is called a "shared interest" benefit. so for example, if a couple is receiving straight life annuity of 1000 a month and they get divorced (hey, who knows why it took 51 years of marriage to call it quits) and as a result of the settlement, the spouse gets 600 a month - that is payable as long as he/she lives and if he/she predeceases the plan participant, the 600 reverts back to the participant. if the participant predeceases the spouse, the whole thing stops
 
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Danmar said:
That's interesting. So if you outlive her, the 46% comes back to you? The CPP ends up getting shared for the years a couple is together. My X worked for some of those years so the effect wasn't that much. I think total effect for me is only a couple hundred dollars a month. As far as frequent flier points go, they tried to get half of mine but on the fate of separation I didn't have hardly any. Talk about petty!
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Yes I was married when early handshake at age 49 so shared the pension for the time I worked as married. It is 100% joint survivorship. She even shares my extended medical which was struck upon retirement.
 
Big_Hitter said:
in a plan subject to ERISA, once the pension has commenced the annuity is generally divided based on the original payment form. this is called a "shared interest" benefit. so for example, if a couple is receiving straight life annuity of 1000 a month and they get divorced (hey, who knows why it took 51 years of marriage to call it quits) and as a result of the settlement, the spouse gets 600 a month - that is payable as long as he/she lives and if he/she predeceases the plan participant, the 600 reverts back to the participant. if the participant predeceases the spouse, the whole thing stops
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Maybe a little more on that?

Let's say the worker retires and selects a benefit with a survivor option. Maybe $1000 / mo while the worker lives, then $750 / mo to the spouse if the worker dies before the spouse.

If the worker dies first, will the company pay the $750 to the spouse?
Or, will the company say a divorced person can't collect the "spousal survivor benefit"?
 
Independent said:
Maybe a little more on that?

Let's say the worker retires and selects a benefit with a survivor option. Maybe $1000 / mo while the worker lives, then $750 / mo to the spouse if the worker dies before the spouse.

If the worker dies first, will the company pay the $750 to the spouse?
Or, will the company say a divorced person can't collect the "spousal survivor benefit"?
Click to expand...

it will depend on the provisions of the QDRO but in a shared interest arrangement, I think it's the former

YYMV, do not construe this as legal advice, etc.
 
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