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Old 05-02-2008, 10:36 PM   #21
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I am not doubting your calculations... but it is comparing apples to oranges...

If you do a monte carlo on the exact same investment and even did a SWR of 6%... there will be a good number of portfolios that your final balance will be many times more than you started... so your IRR is much higher than 6%...

But, with the worst case to cover the 4% SWR is conservative...

SOOO, you can take your 6% and have nothing OR take the 4% and unless something bad happens you will have much more than you started with to leave to whomever you wish...

This is the big problem with talking to people about annuities and the other thread where they were using life insurance and cash value etc.... these REQUIRE you to have ZERO when you die... I much prefer to have something to leave...
I am not going to say that the SPIA is better. I am only saying that for someone conservative, it's not a terrible option. I know it is apples and oranges, but they both are ways for one to invest.

Guys like Bogle say stocks might only return 8%, bonds might only return 4%, for the next period. At a 60/40 split that's not much more than the 6% a SPIA offers, even at today's low rates. (Again, unless I am wrong in the 6% calc.) The insurance Company could blow up, that is a risk. My feeling is the the SPIA is pretty secure, the 60/40...4% SWR is not as secure in my opinion. The SWR does have upside the SPIA does not.

Note that I'm not running out to buy a SPIA tomorrow, but it is interesting. I might someday. (If I did, it would be primarily to lock in the long term rate. I would take some of the income and fund my kids inheritance out of that. Maybe by matching their 401ks, Roths, or ideas like that.) A SPIA would also simplify my spouses management of money at a late age (last to die annuity) which scares me (the annuity salesmen might find the spouse anyway)(and for my kids sake) if I go first. Trusts are pretty expensive options, I might avoid those costs with a SPIA.
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Old 05-03-2008, 04:03 AM   #22
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I would only consider a SPIA to develop some base income level. I would not put all assets in it.

And at that.... now that VG has that endowment fund, I am rethinking our options.
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Old 05-03-2008, 05:55 AM   #23
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Originally Posted by Texas Proud View Post
SOOO, you can take your 6% and have nothing OR take the 4% and unless something bad happens you will have much more than you started with to leave to whomever you wish...

This is the big problem with talking to people about annuities and the other thread where they were using life insurance and cash value etc.... these REQUIRE you to have ZERO when you die... I much prefer to have something to leave...
I'm more worried about have a reserve fund for LTC or other emergencies during my remaining life. A SPIA pays a fixed amount and no more. There are "inflation indexed" annuities but they have significant limitations on payment growth. I'd hate to put a couple of hundred thousand into a SPIA and then find myself in a Medicaid nursing home because the SPIA amount wasn't enough for a "decent" (and I use the term lightly) place. The government would take my payment and I'd be in the same place as if I was totally broke.

If I'm lucky and die quickly/cleanly, I prefer my kids to get my money instead of an insurance company.
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Old 05-03-2008, 06:26 AM   #24
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n;652214]You could lock in 6% for 33 years (as in my example), your CD might only get you 4% the next time it rolls. The point is you have interest rate risk, the annuity doesn't have that.[/quote]

the immeadiate annuties pay more than the current rates you can get in a cd and lock you in forever if you want. if you could get a cd to pay you 6% forever then you got it made. however if the cd was paying 6 the annuity may pay 8 at that time. generally the annuity based on your age will always be higher.

the big pile of dead people enable them to do something your cd,s or bonds cant.


some people are interested in getting the biggest monthly return they can get and spend more then they otherwise might instead of passing money to heirs.

its not always about dying with the biggest pile, for some its about spending more and enjoying more things while they are alive and healthy then they otherwise might do on their own worrying about running out of money if they live to long.


for some like my ex wife they will need every penny they can muster each month to pay bills, there is no need for worrying about passing something to our kids, ill take care of that. for her an imeadiate annuity is perfect as she will have more to live on forever then any laddered cd's or bonds may afford her . ruling out default of the issuer of course
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Old 05-03-2008, 06:42 AM   #25
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n;652214]\
the immeadiate annuties pay more than the current rates you can get in a cd and lock you in forever if you want. if you could get a cd to pay you 6% forever then you got it made. however if the cd was paying 6 the annuity may pay 8 at that time. generally the annuity based on your age will always be higher.

the big pile of dead people enable them to do something your cd,s or bonds cant.


some people are interested in getting the biggest monthly return they can get and spend more then they otherwise might instead of passing money to heirs.

its not always about dying with the biggest pile, for some its about spending more and enjoying more things while they are alive and healthy
RockOn, this is the real discussion. A lot of posters on this never-ending argument have concluded that using a portion of your nest egg to buy an SPIA to cover basic needs is a decent way to sleep at night. Others would never do it. You are focusing on assuring your ability to spend, others are focusing on making sure they don't get screwed out of an additional percentage. Your choice is no better or worse than theirs. As Reverend Wright says, "not deficient, just different."
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Old 05-03-2008, 07:05 AM   #26
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One thing that may have been said but I haven't seen is that the famous "4% SWR" is fully indexed for inflation. There aren't any limits in the FIRECalc program except past history.

It's somewhat questionable comparing an indexed 4% with an insurance company fixed 6%. To do so would require an exact knowledge of the future inflation rate.

I went on the Vanguard site and put in a Texas male born on Jan 1, 1955 that would start receiving annuity payments annually on Jan 1, 2009. If you assume receiving 35 payments (age 86), I got an IRR of 6.36%. Live to 76 and it falls to 5.14%. Live to 96 and the IRR becomes 6.82%. This is the same story. Live forever and an annuity starts looking pretty good.

One of the SPIA arguments is that for "fixed income" the SPIA return is still pretty good. Right now you can't reliably get 4% on a CD. I don't buy that argument because interest rates fluxuate and CDs can be rolled over to the prevailing interest rate at that time. I've seen many years in my lifetime where a 7% 5 yr interest rate was considered very low.

Back to the inflation adjustment, at a nominal 3% inflation rate the payment is cut in half in 25 years. Inflation at 5% would cut it in half in about 14 years. I've seen my 87 year old FIL's private pension that was pretty good 20 years ago when it started fall to an almost insignificant amount today. If it wasn't for his military pension and SS (both COLA'd), he'd be hurting today (actual DW and I would be hurting because he is beyond understanding any finacial question).

If you are worried about losing control of your money, the best route is a custodial/guardian account (for us non-uber weathy). These can be easily set up while you still have your mental capacity.

I can't see any reason for a SPIA unless, as mathjak states, the money is managed by a financial incompetent. Most with ex-wives/husbands would probably put them into that camp. I refuse to accept that anyone that can find this forum can't develop enough financial literacy and understanding to outperform any form of annuities and has no need for a financial advisor to manage their portfolio. I will agree that a FA can help those with more "interesting" finacial situations develop some strategies to address more complicated issues. Long term care of "special needs" individuals comes to mind but there a significant amount of assets would be required. I also think that if you're a basic, plain vanilla type with assets under $5MM you can get what you need with a decent will, POA and living will.
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Old 05-03-2008, 07:53 AM   #27
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2B i think your missing the point... normally we can't get that on our own guaranteed. we could lock into say a 30 year bond and get 4-1/2% right now. we could amortize the principal too over the 30 years and add some principal each month to our interest to make up a higher withdrawl to get closer to the annuity rate but even if we do that we have the risk of out living the amortized principal we have been spending down to add to the rate and we still might not be able to match the withdrawl rate on the immeadiate annuity. and as we spend down the principal the return drops. as the balance shrinks we get less and less each month..

no matter how we try to get that higher fixed rate forever we cant seem to equal it even though we have access to the same investments as the insurers because they have something we can never have. that big pile of dead people defaulting cash into the pool.
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Old 05-03-2008, 08:00 AM   #28
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If i were comparing an inflation adjusted SPIA to a 4% SWR, I'd just look at the payout %, which apparently is 5% in your example, single life only. This is because the SWR is supposed to last until you die, and the SPIA definitely lasts until you die. Though I think the 4% rule-thingee was supposed to be over 30 years [right?] [86-53 = 33 years].

The extra "umph" in the SPIA comes from the people who die early subsidizing the people who die late. If you don't care about leaving any money to heirs, are risk averse, and don't have a spouse/partner [hence single life only], then it might not be a bad idea.

As you get older the extra "umph" from the SPIA will get larger each year. That's why Milevsky has shown [in a number of papers] that it's usually better to wait until your later 60's to annuitize. However, this is assuming your alternative is a portfolio of something like 60%stocks/40%bonds, and there is a realized equity risk premium. If you're just going to be investing in long term bonds/TIPS, are pretty risk averse, and don't care [or don't have the knowledge] to manage your own portfolio, one could make an argument for purchasing an SPIA in your 50's. Of course, the trade-off is that when you "pass on", nothing is left to your heirs.

One strategy that Milevsky has put forth [IIRC], is to instead of buying a large SPIA at once, purchase say 1/5 of the amount each year for 5 years. This spreads out the likelihood of buying annuity when interest rates are the worst, and your payout is the lowest. Kind of like laddering CDs.

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Old 05-03-2008, 08:43 AM   #29
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mathjak, I think you missed my point. You might be able to get a "better" IRR now over high quality corporates (think 20 year bonds) at the same credit quality the insurance company is. The interest rates will fluxuate and right now we are near the lowest levels of most of our lifetimes. Now is not the time to sink it all into an annuity.

ats5g, inflation adjusted SPIA's have significant limitations to how much their payment will increase due to inflation. The 4% SWR has no such restrictions. I agree with your comment about waiting until at least age 60 but I'd put it even later when you have clearly demonstrated the longevity genes. The payout is even higher then. Buying one at age 53 seems absurd because of the many longevity risks that haven't even been tested.

The common attribute I've seen in anyone that "likes" annuities is their belief that all the other people will die first so they can get a great interest rate. I don't have much of a chance of having the longevity genes based on my family history. I'm also very aware of many reasons why someone that seems heathy at age 68 can be attending their own funeral 6 weeks later.
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A new annuity option
Old 05-03-2008, 08:51 AM   #30
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A new annuity option

As long as we're going back and forth on annuities, I'll pop another one on everyone that was touted on the radio last night as I was driving back from the airport (IAH). The touter was Lance Roberts who has a show on AM700 (Houston) and, I believe, AM1120 (Dallas) in case anyone else heard him.

Here's the skinny. A married couple "invests" $406,000 in an annuity when both are at age 55. At age 65, they will receive $40,000 per year (10% payout!) no matter what -- even if the stock market goes to zero. If the market returns are higher, that extra principle will increase the annuity payment (even more!!!). How much wasn't discussed but I'm reasonably sure it only goes up if it exceeds a reasonably heathy return. The payment will continue as long as either one is still alive. I'm sure one of them will make 105 so that's a 10% payout over 40 years.

What a deal! I'm sure you can look up Lance on the internet to send him your money.

Late addition -- He also derided the people that don't think annuities and whole life policies can be good investment products. I do think they are good investment products for the people that sell them.
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Old 05-03-2008, 11:01 AM   #31
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It sounds like the 6% IRR in my example was about correct. I'm glad it is true and that I didn't blow the calcs.
This is a discussion that can go back and forth, but I think the SPIA is in the running of the choices available for conservative retirees. Some level of guarantee is a desireable thing for those of us with an adequate nest egg in place. I don't know if I'll buy one, but I might. A COLA'd SPIA is similar to many government pensions, though the added risk of the insurance company blowing up over 30 years, is always there.
Not wanting to end the thread but thanks to those who participated...
A civil discussion on annuities, that's cool.

2B, you were hearing about the VA living benfits plan I believe, very similar to the SPIA's with a delayed start of withdrawals, the way I see it. There is potential upside, but with all the fees I think the bottom line guarantee could be the likely outcome. If it is, then it really is about the same as a delayed SPIA.
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