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

[Texas Proud]

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Originally Posted by LARS 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]

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Originally Posted by youbet 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]

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Originally Posted by Texas Proud 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]

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Originally Posted by nun 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:

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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]

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Originally Posted by nun 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.


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[youbet]

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Originally Posted by LARS 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]

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Originally Posted by Texas Proud 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]

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Originally Posted by alaska55 .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.

[youbet]

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Originally Posted by 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

I'm assuming you're just passing on TP's error with the "3 year" thing. But, in case I'm missing something, where did you get the "3 year" figure you're using? Why "3 years?"

[Independent]

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Originally Posted by Texas Proud 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...

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.

[Texas Proud]

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Originally Posted by nun 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?

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....

[Danmar]

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.

[LARS]

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Originally Posted by Danmar 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.

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


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[kcowan]

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Originally Posted by Danmar 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...

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.

[Danmar]

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Originally Posted by kcowan 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.

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.

[Big_Hitter]

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Originally Posted by Danmar I already have a generous pension so would not likely consider an annuity other than for this specific reason.

she didn't get a piece of that? normally those get divided

[Danmar]

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Originally Posted by Big_Hitter she didn't get a piece of that? normally those get divided

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.

[Danmar]

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Originally Posted by LARS 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

Ha, Ha. This would have been even more compelling 20 years ago.