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

[nun]

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.

 

[rodi]

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.

 

[aja8888]

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.

 

[nun]

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.

 

[Fean]

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

 

[RunningBum]

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?

 

[Fean]

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 ;-)

 

[hurricane harry]

Here we go again, yawn

 

[RunningBum]

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.

 

[Danmar]

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.

 

[audreyh1]

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.

 

[LARS]

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.


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[RunningBum]

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.

 

[LARS]

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...


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[Independent]

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.

 

[Sunset]

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.

 

[Independent]

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]

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 ?

 

[Running_Man]

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.

 

[Sunset]

.....
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.

 

[Fean]

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.

Thanks for the feedback. I completely agree with your statement. I'm very concerned about long-term inflation. I'm also very concerned about having a steady "semi-guaranteed" income stream.

My current plan is a compromise that over the course of 25 years gradually moves us from 60% equities, 20% inflation adjusted bonds, and 20% non-inflation adjusted bonds to an AA with 60% equities, 20% inflation adjusted bonds, and 20% SPIAs. The intent is to be resilient to inflation while also reducing a little of the uncertainty along the way with the SPIAs. At the end of this process, we'd hopefully have our basic needs covered with the SPIA + SS floor.

I haven't seen anyone else promote this type of strategy so I'm not ruling out the possibility that it is insane ;-) The good news is that I don't plan to take any action on this for several years yet so I still have time to come to my senses if it truly is insane.

 

[pb4uski]

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. ....

Wrong. There are two different types of SPIAs... life contingent and period certain. The former is insurance and the latter is an investment (like a bond or CD).

For the period certain SPIA it is very easy to calculate the return on investment since the cash flows are defined in the contract... you just calculate the IRR and that is the return.

 

[rodi]

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.

 

[Chuckanut]

Rodi, you make to much sense. Obviously you are a dangerous radical.


The worst decisions are made when angry or impatient.

 

[Midpack]

Since many of us are repeating ourselves.

We have no pension at all, and SS will not provide our planned floor income. As for buying a SPIA, there is no harm in waiting, as long as our portfolio comfortably exceeds the cost of the necessary SPIA - see recent annuitization hurdle thread. As for peace of mind, I couldn't sleep at night knowing I bought a SPIA at the current historically low interest rate/yield/payout rates - they are relatively expensive right now. YMMV