Stocks and SPIAs - the best way to go?

[easysurfer]

When I think of SPIAs, I think of it in terms of insurance (against not having an income stream in a really bad market or outliving my savings) and not as an investment. Or I'd think of the SPIA as a bridge before social security.

 

[haha]

I agree from an intuitive standpoint although I'm always mindful of a Bogle comment that he felt that the risk of rising rates was overstated because the additional coupon over time would make up for the drop in valuation. The period of increasing rates in the late 70's early 80's was before my investment time so I don't know what that "feels" like.

That is the meaning of duration. The problem with very low rates and long maturities is that duration will be quite long. So it might be quite a while before the rising coupons compensate for your capital loss.

And of course for people who believe that one can blithely take a certain % of their portfolio, long bonds and rising rates are pure loss.

Ha

 

[mathjak107]

I agree from an intuitive standpoint although I'm always mindful of a Bogle comment that he felt that the risk of rising rates was overstated because the additional coupon over time would make up for the drop in valuation. The period of increasing rates in the late 70's early 80's was before my investment time so I don't know what that "feels" like.

thats not true for all bond funds. only treasuries or the highest rated corporates . what your talking about is a funds duration and anything that has credit risk wont hold true since a downgrade in credit will upset the apple cart .

because a bond fund is always buying and selling bonds its interest rate is always changing unlike an individual bond which stays fixed for ever.

so lets take a bond fund you just bought in to.

if its a treasury bond fund and at 10 bucks a share and paying 5% with a duration value of 5 heres is what happens.

rates rise 1% and your share price falls 5%. if the funds duration value is 5 then the value of your fund falls to 9.50 but your

collecting 6% interest now not 5%. thats because the fund is always selling old bonds and buying higher rate new bonds. so at

the end of 5 years you are whole again back to your origonal deal. you have a share price at 9.50 so your down there but you collected an extra 1% interest for 5 years making up for the drop.


the other problem is your always behind the curve if rates are rising.

 

[Huston55]

I find it interesting that inflation adjusted SPIAs did not do that well due to their higher cost offsetting the inflation adjustment benefits.

If you go to Pfau's blog, in the comments section there's a link to a graph that includes the efficient frontier for other annuity types. It depicts that fixed SPIA is better.

 

[rescueme]

When I think of SPIAs, I think of it in terms of insurance (against not having an income stream in a really bad market or outliving my savings) and not as an investment. Or I'd think of the SPIA as a bridge before social security.

You are correct.

An SPIA is an income product (and also a way to manage your retirement asset distributions), not an investment product such as a CD, equity's, bonds, etc.

That's why a lot of folks will not consider them in their planning. They can (for instance) state that they could get a better rate on a CD. Sure they can, but a CD cannot payout the principal (and pay a decent rate as the total invested amout is reduced) during the term of the CD, to be used as current income in retirement.

They are two different "products", with two different goals.

 

[Midpack]

Will SPIAs perform better than a bond index or munis, or corporate bonds over the next 20 years? I wish I knew.

Barring a insurance company failure (historically unlikely if not unheard of), a SPIA is predictable - a bond/muni/corporate index is not. Clearly bond fund NAVs have far more downside risk than upside with interest rates at historic lows. I'm not advocating SPIAs or any other annuity, but for those who want some (floor) income (virtually) without risk, SPIAs are predictable where bond funds are not. Some people cannot stomach or afford much risk in retirement, some can.

And I can find few if any "experts" who are predicting we'll see the same kind of returns we've seen from 1926-2000 in the decades ahead with the underpinnings of our economy/global competitive landscape, though anything is possible.

 

[nun]

Barring a insurance company failure (historically unlikely if not unheard of), a SPIA is predictable - a bond/muni/corporate index is not. Clearly bond fund NAVs have far more downside risk than upside with interest rates at historic lows. I'm not advocating SPIAs or any other annuity, but for those who want some (floor) income (virtually) without risk, SPIAs are predictable where bond funds are not. Some people cannot stomach or afford much risk in retirement, some can.

And I can find few if any "experts" who are predicting we'll see the same kind of returns we've seen from 1926-2000 in the decades ahead with the underpinnings of our economy/global competitive landscape, though anything is possible.

I agree. I just find it a bit amusing that income products like SPIAs are now in vogue. IMHO they have always had a place in a portfolio to provide baseline income along with SS. The emphasis on equity and bond funds is a product of the switch from defined benefit pension plans to 401k type accounts.

The prevailing approach to retirement in the UK is still to take your pension savings and buy an annuity. People want income not investments from which to draw income as most people do not have a history of managing their own investments. Although DC plans are now becoming common with the UK equivalent of mutual funds.

 

[Animorph]

What does he mean by "Percentage of Lifetime Spending Needs Which are Satisfied (10th Percentile Outcome)"?

I believe that is how much of the desired 6% income rate is achieved by 90% of the test scenarios. With 2% by SS, that leaves 4% for the equity/SPIA/bond combos. It does seem a bit strange to me that 100%SPIA's in this chart still leaves a remainder at death though. I think that's due to the SPIA's giving excess income that is then saved for inflation and heirs.

 

[rescueme]

I think that's due to the SPIA's giving excess income that is then saved for inflation and heirs.

Hopefully so.

In our case, we are not only planning for ourselves but also for the future of our adult (disabled) "child" after we're gone.

We are not concerned with passing when our last penny is spent, as many other folks desire. In a way, it's a bit easier than the majority of folks that want to match up their date of death to the expected date of the termination of their assets.

Just our situation...

 

[nun]

As the paper uses current returns for bonds I'm not surprised that SPIAs win out and that using historical data Wellesley does so amazingly well (after all it coincides with the bond bull market). The big problem I have with all of this is that I don't know future bond and equity returns, so how useful in retirement planning is the paper?

 

[Khufu]

I agree. I just find it a bit amusing that income products like SPIAs are now in vogue.

It makes sense that in a low interest rate environment that the value of the mortality credit, which is only available through an annuity, should increase.

 

[nun]

It makes sense that in a low interest rate environment that the value of the mortality credit, which is only available through an annuity, should increase.

Sure, right now bonds don't look good as income providers. So if we project the current interest rate environment forward over 30 years of retirement, SPIAs will come out on top. But is it a good idea, or valid, to do that? If I lock 50% of my money in an SPIA I might loose out on a future bond rally. SPIAs, bonds, equities, SS, pensions and zero debt all have a place in a retirement portfolio. Uncertainly about the future argues for diversification, so I think the paper uses the current interest rate environment to do a bit of grandstanding.

 

[rescueme]

SPIA's are in vogue for more than a few reasons.

First of all, today's retirees (e.g. 65) do not have the same retirement income streams as their parent/grandparents had, assuming that they are not government (e.g. federal, state, local) employees.

Private companies started to offload their defined benefit plans (e.g. pension) in the early 80's, as IRA's and 401(k)'s became into place.

The idea of my parents/grandparents saving/investing for retirement was not the norm. They had their private company pension plans, their SS, and their additional savings, if any. It was the "three legged stool".

I/DW got caught in the "changeover" when our respective pensions were eliminated, in favor of the 401(k). Additonally, even those with pensions had them under different rules. I w*rked at a company from 1970-79, but lost my pension due to the then 10-year vesting period, under federal rules.

In reality, my parents/grandparents did not need to worry about investing to get "their number", nor worry about how to convert that number into retirement income.

That's what a lot of the early "bleeding edge boomers" (as I/DW are) are facing. How to convert that pot of money (assuming they have it) into a continuous income stream for the rest of their lives.

That's where products such as an SPIA come into play. Unlike VA's, SPIA's do not come with upfront fees (I know, we have one), but the decision is based upon the options you seek and the monthly amout you will get. All costs/profits are derived from the preimum you pay and the investment gains the insurance company can generate. If you have a "salesman" trying to sell you an SPIA - run. They are not selling you a true SPIA, but another annuity product.

It's simple to determine and measure. The most important thing is do you need an SPIA for your distribution/income plan to work? If you have sufficient retirement income to meet your needs, maybe not. SPIA's are an answer, but only if you have the question that they can answer.

We're going through a period of time where things are changing - again. First we had pensions, then we had IRA/401(k)'s, and now we (of the boomer crowd) need to know how to convert part of those holdings into a lifetime income stream.

The reason SPIA's are being talked about is that this is the first time that so many folks are asking the question of how to de-accumulate their holdings. It's a great sea change in thinking...

 

[nun]

The reason SPIA's are being talked about is that this is the first time that so many folks are asking the question of how to de-accumulate their holdings. It's a great sea change in thinking...

SPIAs, or their equivalent, are the usual retirement savings and income accounts in many foreign countries. They are used in the accumulation and the income phases. I remember when I came to the US from the UK 25 years ago and I got into my employer's retirement plan. I was offered TIAA-Traditional and CREF mutual funds based accounts. My knee jerk choice was TIAA-Traditional because it was "guaranteed" and looked just like the conservative plan my father had in the UK to supplement his DB plan. Accounts where you managed your own funds weren't even available.......I bet the fees were outrageous though.....as they still tend to be in the UK. Everything was geared to having a safe and well known source of income. Each week you paid your premium to a pension/insurance company and when you retired you got a pension. My father died 15 years ago, but my mother is still living of the surviving spouse's part of my father's DB plan and the supplemental purchased pension. Maybe I shouldn't be asking why SPIAs are popular now, but why annuity type products were never popular before, in the accumulation phase.

By the way I still have my TIAA-Traditional, this year it's return will be a 4.2%. I've kept paying into it at a small level through various employers plans so that I will have another stable source of income in addition to SS and as a compliment to the unknowability of the stock and bond markets.

 

[Khufu]

Sure, right now bonds don't look good as income providers. So if we project the current interest rate environment forward over 30 years of retirement, SPIAs will come out on top. But is it a good idea, or valid, to do that? If I lock 50% of my money in an SPIA I might loose out on a future bond rally. SPIAs, bonds, equities, SS, pensions and zero debt all have a place in a retirement portfolio. Uncertainly about the future argues for diversification, so I think the paper uses the current interest rate environment to do a bit of grandstanding.

It may very well be that interest rates return to the levels prevailing prior to 2008, but I am skeptical of the widely held belief that such an outcome is inevitable and even to be followed by inflation. The US could follow the example of Japan and face a very low interest rate environment for a generation or more. I stop short of making that a prediction, but I think it is quite possible.

I do agree that in the face of unresolvable uncertainty diversification is necessary. However, few retiree investors will include SPIAs in their allocations despite their genuine advantages.

 

[ejman]

It may very well be that interest rates return to the levels prevailing prior to 2008, but I am skeptical of the widely held belief that such an outcome is inevitable and even to be followed by inflation. The US could follow the example of Japan and face a very low interest rate environment for a generation or more. I stop short of making that a prediction, but I think it is quite possible.

I do agree that in the face of unresolvable uncertainty diversification is necessary. However, few retiree investors will include SPIAs in their allocations despite their genuine advantages.

I also feel that a Japan like scenario is a very likely prognosis. Governments have developed very effective tools for dealing with inflation. A debt driven deflationary environment is much tougher because historically the only cure is massive investments far beyond what any rational, prudent populace would stand for. The only cohesive force to motivate a population to support this level of investment is large scale war. Todays technology makes such large scale war (thankfully) unlikely. Little wars like Iraq and Afganistan although large in human suffering are not large enough to move the needle in the scale of global economies. So I think that things will just muddle thru economically for quite a while.

 

[Chuckanut]

FYI

I just finished listening to a podcast on this subject with Dr. Pfau.

Retirement Researcher Blog: Do Retirees Really Need Bonds?

One of his closing remarks interested me: Do not annuitize when 65, wait until 70 or 75. But he needs to investigate this further. Stay tuned for a more comprehensive approach.