Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
SPIAs: Terrible investments, ok insurance....discuss
Old 01-22-2016, 08:55 PM   #1
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,835
SPIAs: Terrible investments, ok insurance....discuss

No one should invest in an SPIA, they should buy one to insure against catastrophic loss of income knowing that inflation will reduce its buying power. VAs are not even worth considering.
__________________

__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”

Current AA: 65% Equity Funds / 20% Bonds / 7% Stable Value /3% Cash / 5% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
nun is online now   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 01-22-2016, 09:35 PM   #2
Moderator
rodi's Avatar
 
Join Date: Apr 2012
Location: San Diego
Posts: 8,796
That's a valid way of looking at it. Presuming they don't have an income floor already from pension/SS/rent/trust fund/whatever.

My husband and I have discussed buying a SPIA in the future - when we're older and rates are better, or some combo thereof.
__________________

__________________
Retired June 2014. No longer an enginerd - now I'm just a nerd.
micro pensions 7%, rental income 18%
rodi is offline   Reply With Quote
Old 01-22-2016, 09:59 PM   #3
Moderator Emeritus
aja8888's Avatar
 
Join Date: Apr 2011
Location: The Woodlands, TX
Posts: 7,128
Quote:
Originally Posted by nun View Post
No one should invest in an SPIA, they should buy one to insure against catastrophic loss of income knowing that inflation will reduce its buying power.
Not buying while interest rates are at these lows.
__________________
......."Everybody has a plan until they get punched in the face." -- philosopher Mike Tyson.
aja8888 is offline   Reply With Quote
Old 01-23-2016, 10:02 AM   #4
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,835
Quote:
Originally Posted by aja8888 View Post
Not buying while interest rates are at these lows.
For most insurance products we would emphasize the removal of risk over the cost. Sure we would shop around to get the best deal but would not be without the insurance. So waiting for rates to rise seems to miss the main point of an annuity.
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”

Current AA: 65% Equity Funds / 20% Bonds / 7% Stable Value /3% Cash / 5% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
nun is online now   Reply With Quote
Old 01-23-2016, 10:03 AM   #5
Dryer sheet aficionado
 
Join Date: Feb 2013
Location: Small town in flyover country
Posts: 43
SPIAs aren't terrible investments. They aren't investments at all ;-) That would be like saying my dog is a terrible cat. SPIAs are insurance -- plain and simple.

However, that being said, I believe that I am quite a bit more fond of SPIAs than most members on this forum. DW and I retired very early (late 30s) with no pensions and relatively small expected SS due to lots of $0 earning years. That makes "guaranteed" income streams for life very appealing to me. I know that I'll almost certainly earn less if I use SPIAs but paying someone else to bear some of the market risk is worth it to us.

Our plan includes laddering small SPIAs (non-COLA'ed unless something drastic changes in the SPIA landscape) roughly every 5 years from age 45 to 70 with the goal of converting ~20% of our portfolio (half of our fixed income portion with the other half in inflation-protected bonds) into SPIAs by the time we hit 70 and take SS. Between SS and the SPIAs we should be able to cover our basic needs. This is important to me because I am concerned about cognitive decline and our ability to make good investment decisions in late retirement.

Yes, I know that statistically it would be much better for us to buy all of the SPIAs at 70 instead of laddering them. However, from a sleep-at-night perspective, smoothing out market bumps and getting steady income is worth it to us. At least, I think it will be. We'll see what I actually do if interest rates are still abysmal when I hit 45 ;-)

-Fean
__________________
Spirit of FIRE
Fean is offline   Reply With Quote
Old 01-23-2016, 10:24 AM   #6
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 5,161
I don't consider SPIAs insurance. To me, insurance is pooling risk. Paying some money in order to protect against a major event that is more or less unlikely to happen, but if it does, will likely cost me a lot more money. You can slant your head and make a case that it really is like insurance, but it's a lot more logical to me to treat it as an investment.

I very much consider it an investment option, at least somewhat comparable to bonds, TIPs, CDs, and other instruments that offset the risk of equities. It is different in that it is a guaranteed income stream (as long as the company stays in business). It won't be eroded as you dip into your principal, so this is a good tool if you are worried about outliving your assets.

I think that posts #3 & 4 show why this isn't like insurance. Unlike going a few days without car, home, medical, or life insurance, where an event could totally wipe you out, the SPIA decision can be deferred to a more optimal time to buy one. Sure, there is market risk too, but that seems very different to the other risks we insure. Mainly, if I stay in the market my money could double just as easily as it could halve. With the other kind of insurance, deferring it just saves me the cost of the premium.

An SPIA is a tool to provide income for my retirement, very much like my other investments. Thus, I'll treat it as an investment, and measure the risk/return like the others. The return is probably not that good unless I outlive the actuarial tables by a lot, but if I only considered return without risk I'd probably be 100% in equities, which I am not.

Am I the only one that thinks this way, and the rest of you consider it insurance?
__________________
RunningBum is offline   Reply With Quote
Old 01-23-2016, 10:45 AM   #7
Dryer sheet aficionado
 
Join Date: Feb 2013
Location: Small town in flyover country
Posts: 43
Quote:
Originally Posted by RunningBum View Post
I don't consider SPIAs insurance. To me, insurance is pooling risk. Paying some money in order to protect against a major event that is more or less unlikely to happen, but if it does, will likely cost me a lot more money.
That sounds like a SPIA to me, but it's certainly possible that my perspective is off. The insurance company from which you buy the SPIA pools the longevity risk. Also, if an unlikely black swan market downturn hits then you will have paid the insurance company to bear the cost instead of you.

I probably shouldn't be too dogmatic though. In my previous post, I referred to having SPIAs be a percentage of my portfolio. That sounds like an investment ;-)
__________________
Spirit of FIRE
Fean is offline   Reply With Quote
Old 01-23-2016, 10:48 AM   #8
gone traveling
 
Join Date: Jun 2015
Location: seattle/dahlonega
Posts: 77
Here we go again, yawn
__________________
hurricane harry is offline   Reply With Quote
Old 01-23-2016, 11:00 AM   #9
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 5,161
Quote:
Originally Posted by Fean View Post
That sounds like a SPIA to me, but it's certainly possible that my perspective is off. The insurance company from which you buy the SPIA pools the longevity risk. Also, if an unlikely black swan market downturn hits then you will have paid the insurance company to bear the cost instead of you.

I probably shouldn't be too dogmatic though. In my previous post, I referred to having SPIAs be a percentage of my portfolio. That sounds like an investment ;-)
OK, pooling the longevity risk gives it some semblance of insurance, but the black swan event is the opposite of most insurance. I pay some money regularly to my car insurance company, and if I have a bad accident I will get much more money back to replace my car, plus pay any liability I may have incurred. With an SPIA I pay a large sum up front and the income trickles in at the same rate regardless of any event, other than that it stops at death.
__________________
RunningBum is offline   Reply With Quote
Old 01-23-2016, 11:09 AM   #10
Thinks s/he gets paid by the post
 
Join Date: Dec 2009
Location: Alberta/Ontario/ Arizona
Posts: 3,121
Quote:
Originally Posted by nun View Post
For most insurance products we would emphasize the removal of risk over the cost. Sure we would shop around to get the best deal but would not be without the insurance. So waiting for rates to rise seems to miss the main point of an annuity.
Agree. These are longevity risk mitigation products, not investments. As you say we don't not buy insurance because rates are low or high.
__________________
Danmar is offline   Reply With Quote
Old 01-23-2016, 11:17 AM   #11
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 16,452
I agree - if one feels the need for an annuity, to guarantee a minimal amount of expenses are met, because that person is not comfortable with market volatility, then waiting for interest rates to rise seems beside the point.
__________________
Well, I thought I was retired. But it seems that now I'm working as a travel agent instead!
audreyh1 is online now   Reply With Quote
Old 01-23-2016, 11:28 AM   #12
Full time employment: Posting here.
 
Join Date: Oct 2009
Posts: 942
Seems to me there are good reasons to consider an SPIA. However, to my mind, the time to consider is much later in life. Earliest would be 70. Obviously an SPIA has two components: interest rate and duration. By waiting to significantly later in life, lower duration risk for insurer increases monthly payout and has the added benefit of decreasing inflation risk (shorter time frame to erode payments). So to my mind, I personally would only consider later in life, or with a substantial deferred component.


Sent from my iPad using Early Retirement Forum
__________________
LARS is online now   Reply With Quote
Old 01-23-2016, 11:50 AM   #13
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 5,161
Quote:
Originally Posted by Danmar View Post
Agree. These are longevity risk mitigation products, not investments. As you say we don't not buy insurance because rates are low or high.
I don't defer insurance because the catastrophic event could happen at any time and there is no other good alternative to cope with it unless I want to self-insure. I don't know how high insurance rates would have to get for me to self insure against personal liability and catastrophic medical expenses.

For an SPIA, what's the risk in waiting? I have other investment alternatives for dealing with a major stock market fall. While interest rates are low, I can get short-term CDs so that I'm not tying myself to these rates for the rest of my life. And for coping with longevity risk, isn't it better to wait longer? If I die while deferring, an SPIA would've turned out to be a terrible choice.

I feel like I must be missing something because I seem to be at odds with most on here. I'm trying to make my points so that I can learn, not to be argumentative.

A pension is another longevity risk mitigation tool, but if someone has an option to cash out, isn't that an investment decision? Seems like very much the same thing.
__________________
RunningBum is offline   Reply With Quote
Old 01-23-2016, 12:03 PM   #14
Full time employment: Posting here.
 
Join Date: Oct 2009
Posts: 942
Quote:
Originally Posted by RunningBum View Post

For an SPIA, what's the risk in waiting? And for coping with longevity risk, isn't it better to wait longer? If I die while deferring, an SPIA would've turned out to be a terrible choice.

I feel like I must be missing something because I seem to be at odds with most on here. .

Certainly not at odds with my views...


Sent from my iPad using Early Retirement Forum
__________________
LARS is online now   Reply With Quote
Old 01-23-2016, 12:10 PM   #15
Thinks s/he gets paid by the post
 
Join Date: Oct 2006
Posts: 3,811
Quote:
Originally Posted by aja8888 View Post
Not buying while interest rates are at these lows.
Have you considered what you'd sell to pay for the annuity?

If I consider an SPIA part of the fixed portion of my AA, then I'd sell bonds. But, if I wait until interest rates go up to sell my bonds, I'll sell them for less than I could get today. It seems that if the duration of the bonds I'd sell is the same as the duration of the bonds the insurance company buys, this would be a wash.
__________________
Independent is online now   Reply With Quote
Old 01-23-2016, 12:12 PM   #16
Thinks s/he gets paid by the post
Sunset's Avatar
 
Join Date: Jul 2014
Location: Chicago
Posts: 4,707
Quote:
Originally Posted by RunningBum View Post
I don't defer insurance because the catastrophic event could happen at any time and there is no other good alternative to cope with it unless I want to self-insure. I don't know how high insurance rates would have to get for me to self insure against personal liability and catastrophic medical expenses.

For an SPIA, what's the risk in waiting? I have other investment alternatives for dealing with a major stock market fall. While interest rates are low, I can get short-term CDs so that I'm not tying myself to these rates for the rest of my life. And for coping with longevity risk, isn't it better to wait longer? If I die while deferring, an SPIA would've turned out to be a terrible choice.

I feel like I must be missing something because I seem to be at odds with most on here. I'm trying to make my points so that I can learn, not to be argumentative.

A pension is another longevity risk mitigation tool, but if someone has an option to cash out, isn't that an investment decision? Seems like very much the same thing.
I appreciate your discussion along with everyone else's. It gives one food for thought.

Whether a person considers it an insurance (pools longevity risk, protects against stock/bond devaluation) or an investment (buy X for cash flow). It can for some folks be useful.

I have not bought one, as it's not needed and I'm too young right now, but since I don't have a pension, it is a thing to keep in mind.
__________________
Sunset is offline   Reply With Quote
Old 01-23-2016, 12:12 PM   #17
Thinks s/he gets paid by the post
 
Join Date: Oct 2006
Posts: 3,811
Quote:
Originally Posted by nun View Post
No one should invest in an SPIA, they should buy one to insure against catastrophic loss of income knowing that inflation will reduce its buying power. VAs are not even worth considering.
I'd say that non-COLA'd SPIAs are not even worth considering unless I'm old enough that the inflation risk seems minimal.

I'd be fine with a properly structured VA. It needs the same expense loads as a typical SPIA, and a TIPS fund as an investment option.
__________________
Independent is online now   Reply With Quote
Old 01-23-2016, 12:15 PM   #18
Thinks s/he gets paid by the post
 
Join Date: Oct 2006
Posts: 3,811
Of course, we've seen many threads on this. Can I be the first one to mention "longevity insurance" (deferred annuities with no surrender benefits) instead of SPIAs ?
__________________
Independent is online now   Reply With Quote
Old 01-23-2016, 12:15 PM   #19
Thinks s/he gets paid by the post
 
Join Date: Sep 2006
Posts: 1,685
Presently I am having no intention of purchasing any more SPIA's. To say they are not an investment is not true to me, I certainly looked at the SPIA I bought in 2007 with a 4% step up and 4% payout in 2007 annually as an investment that was returning more than what I could see the fixed income market returning over the long run and consider it part of my fixed income. I was expecting interest rates and inflation to be very low for the foreseeable future and while many advocated inflation indexed SPIA's they were more expensive than the 4% step up and I thought would pay less over the long run, I continue to hold a similar view.

And that to me is the advantage of an SPIA, you can invest a portion of your fixed income allocation in an SPIA and get a higher annual payout than you could with fixed income, leaving less for heirs. The advantage to one now is that even at these low interest rates the United States has one of the highest interest rates in the world, of the top credit worthy countries, and there is no guarantee that interest rates are going to go up any time soon with all the global deflationary pressures. An increase in rates does not seem to me anything that will be occurring in the next couple of years, if anything rates may be declining from here in my opinion to align with the rest of the world. In 2007, the argument made on this board against my purchase of the SPIA was that I would be purchasing them at a low interest rate time in the market, now 8 years later even being older I cannot come anywhere close to getting the price I paid back then.
__________________
Running_Man is offline   Reply With Quote
Old 01-23-2016, 12:19 PM   #20
Thinks s/he gets paid by the post
Sunset's Avatar
 
Join Date: Jul 2014
Location: Chicago
Posts: 4,707
Quote:
Originally Posted by Fean View Post
.....
Our plan includes laddering small SPIAs (non-COLA'ed unless something drastic changes in the SPIA landscape) roughly every 5 years from age 45 to 70 with the goal of converting ~20% of our portfolio (half of our fixed income portion with the other half in inflation-protected bonds) into SPIAs by the time we hit 70 and take SS. Between SS and the SPIAs we should be able to cover our basic needs. This is important to me because I am concerned about cognitive decline and our ability to make good investment decisions in late retirement.

Yes, I know that statistically it would be much better for us to buy all of the SPIAs at 70 instead of laddering them. However, from a sleep-at-night perspective, smoothing out market bumps and getting steady income is worth it to us. At least, I think it will be. We'll see what I actually do if interest rates are still abysmal when I hit 45 ;-) ....
I hope you think long and hard about this some more as predicting that far in the future is ripe with errors. Inflation over 30 - 40 years is a big concern.
I do suppose if I saw interest rates jump back up to ~20% like they were about 35 yrs ago, I'd buy an annuity at that time, of course even a long term cd/bond would be pretty sweet.
__________________

__________________
Sunset is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Lets discuss some real time option trades utrecht Stock Picking and Market Strategy 73 01-14-2012 08:06 PM
Airline customer service rep--what a terrible job samclem Other topics 12 08-13-2006 03:01 PM
Discuss Retirement on CNBC- Audience Opportunity CNBCsg Other topics 9 07-13-2006 08:28 PM
Interesting Article, please read and discuss. TomSimpsonAZ FIRE and Money 16 06-27-2006 08:19 PM

 

 
All times are GMT -6. The time now is 09:49 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.