Vanguard SPIA's....IRR=?

[RockOn]

When I calculate the IRR of a quote for a Vanguard Lifetime Income annuity based on retiring at about 53 and living to 86, the IRR is about 6%?

I would have thought it was only 4%.

It also shows a CPI-U adjusted withdrawal rate of a little over 5% based on a single life. That's better than the SWR of 4% always talked about. I realize the risks are different and the upside is gone, but that return is actually not that bad. I suppose that's been discussed many times. What has been concluded?

And that's at todays lower interest rates.

For someone conservative and not concerned with losing the upside, are SPIA's actually reasonably competitive with the 60/40....4% SWR, or am I missing something?

 

[cute fuzzy bunny]

I think you have to throw in the loss of principal at the end in your SPIA IRR calcs...that gums up the works a bit. I think you'll find that you're getting something closer to 2.5-3.5% depending on the age and health once you throw that part in.

I could have a 7%-8% "SWR" if I was calculating a zero portfolio at age 86.

 

[Rich_by_the_Bay]

Yeah, I'd bet you're counting the whole distribution payment which, in fact, includes a component of principle in addition to returns.

 

[RockOn]

I think you have to throw in the loss of principal at the end in your SPIA IRR calcs...that gums up the works a bit. I think you'll find that you're getting something closer to 2.5-3.5% depending on the age and health once you throw that part in.

I could have a 7%-8% "SWR" if I was calculating a zero portfolio at age 86.

I did use a zero for principal at the end, it still came up with 6%. I am surprised at that.

As far as your SWR, I'm pretty sure they use zero at the end (maybe a little after 86) for the norml 4% SWR calculation also.

Maybe annuities are not that bad.

 

[RockOn]

Yeah, I'd bet you're counting the whole distribution payment which, in fact, includes a component of principle in addition to returns.

That is correct that I am including principle return. But looking at it in investment terms, it calculates to a 6% IRR unless I'm messing it up somehow.

 

[2B]

As you make another positive SPIA comment I must start questioning whether you are trolling. However, back to your question.....

Your comment about "beating" the SWR rate of 4% neglects to mention that when using the 4% SWR you end up with a substantial portfolio left at the end for either you increasing your spending somewhere along the line or leaving money for LTC or your heirs. With the SPIA, the money coming in is fixed in all cases and when you die the final balance is zero. The payout assumes capital is depleted. No residual is available to fund LTC in the couple years prior to death.

The IRR calculation is based on when you expecti to die. You picked 86 which is reasonably conservative for most people. I don't know what the mortaility table would say for a 53 year old but that seems reasonable if you are in excellent health and longevity genes run in your family. I haven't bothered to check your calculations but I suspect the return is high. Again, any annuity drives the payout to return capital over the life of the annuity. The SWR of 4% will possibly go below zero or quadruple.

All of your comments compare a "certainty" to a long term historical return with some cases lower and some cases significantly higher. Tou are comparing apples to oranges.

 

[RockOn]

As you make another positive SPIA comment I must start questioning whether you are trolling. However, back to your question.....

Your comment about "beating" the SWR rate of 4% neglects to mention that when using the 4% SWR you end up with a substantial portfolio left at the end for either you increasing your spending somewhere along the line or leaving money for LTC or your heirs. With the SPIA, the money coming in is fixed in all cases and when you die the final balance is zero. The payout assumes capital is depleted. No residual is available to fund LTC in the couple years prior to death.

The IRR calculation is based on when you expecti to die. You picked 86 which is reasonably conservative for most people. I don't know what the mortaility table would say for a 53 year old but that seems reasonable if you are in excellent health and longevity genes run in your family. I haven't bothered to check your calculations but I suspect the return is high. Again, any annuity drives the payout to return capital over the life of the annuity. The SWR of 4% will possibly go below zero or quadruple.

All of your comments compare a "certainty" to a long term historical return with some cases lower and some cases significantly higher. Tou are comparing apples to oranges.

Not trolling, quite serious. I was surprised the IRR on the annuity is that high.

I'm not really trying to start the 4% SWR arguement. But the annuity does seem better than I would have thought. With the 4% SWR things could blow up, the annuity has it's own risks.

 

[73ss454]

I'll never get this annuity thing. Last year I bought 2 cd's from Pen Fed. One at 6% and one at 6 1/4% and at the end of 7 years I get my 200K back. Why would I want to get the same or less return and have nothing when I die.

 

[RockOn]

I'll never get this annuity thing. Last year I bought 2 cd's from Pen Fed. One at 6% and one at 6 1/4% and at the end of 7 years I get my 200K back. Why would I want to get the same or less return and have nothing when I die.

I'm not saying it's best for you. It's really not as simple as you are getting nothing when you die, you are getting paid more than you could get safely (long term, your CD's only lock in a few years) while you are alive. If you wanted to you could funnel it into a kids Roth or something. Just a side thought, not a plan.

 

[73ss454]

I'm not saying it's best for you. It's really not as simple as you are getting nothing when you die, you are getting paid more than you could get safely anywhere else while you are alive. If you wanted to you could funnel it into a kids Roth or something. Just a side thought.

Well, if your getting 6% and I'm getting 6 to 6 1/4 how do you figure I'd be getting paid more with the annuity?

I must be slow because I just can't put my brain around these annuities.

 

[RockOn]

Well, if your getting 6% and I'm getting 6 to 6 1/4 how do you figure I'd be getting paid more with the annuity?

I must be slow because I just can't put my brain around these annuities.

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.

 

[73ss454]

You could lock in 6% for 33 years, as in my example, your CD might only get you 4% the next time it rolls. That is the point.

Maybe, but as we've discussed may time here that you can't time the market. I can remember a time when we were getting 16% on CD's and if that was the case I'd be locked into 6% for 33years. Remember one other thing, I'd still have my money to leave for my kids. You wouldn't have that option.

Not for me, no way, no how.

 

[RockOn]

Maybe, but as we've discussed may time here that you can't time the market. I can remember a time when we were getting 16% on CD's and if that was the case I'd be locked into 6% for 33years. Remember one other thing, I'd still have my money to leave for my kids. You wouldn't have that option.

Not for me, no way, no how.

Even if CD's were 16% which is probably not likely to happen again in our lives, I doubt you could get more than 10 years of lock.

I have kids and want to leave them a fortune also, but I'm still interested. There are ways to get the money to them, even if you buy one of these. I think locking in 6% for 33 years is interesting. A Treasury is safer but now you can only get about 4.5%. This all assumes the 6% IRR on the SPIA is correct, maybe I am off on that somehow.

I'm not an annuity salesperson and could care less about that issue.

 

[cute fuzzy bunny]

unless I'm messing it up somehow.

You are.

 

[Rich_by_the_Bay]

That is correct that I am including principle return. But looking at it in investment terms, it calculates to a 6% IRR unless I'm messing it up somehow.

Try this formula in your own spreadsheet to double check (gives annual payment amount if paid at the beginning of each year:

=PMT(ReturnRate, numberOfPeriods, InitialInvestment, 0, 1)

Your presumed IRR in an annuity for a youngish person would amaze me. For example, $100,000 at 3.7% for 33 years gives payments of $5108 at the beginning of each year. That's an interest of 3.7%, not $5108.

Hope that helps.

 

[73ss454]

Well, that's what make the world go around. If you think it's a good deal then it's a good deal for you. I just don't see it, and I guess I never will.

After being sold some Whole life policies and have all 3 go to class action I don't have a love to ins. companies. The only good thing is I was awarded good payouts for all the lies I was told by the salespeople. Even going via Vanguard you still have to deal with and ins. co. which I choose not to do.

 

[RockOn]

You are.

Help me then. I didn't save it but I remember assuming that I started by buying a $1,000,000 annuity which had a yearly income of $52k CPI-U adjusted (I think I used 2.8%) for 33 years with nothing left. The IRR was 6% on handy HP calculator.

I should redo it so I have the exact numbers before someone jumps me on being precise, but I did get a 6% IRR.

Sorry....hold that thought, the $52k isn't right let me get my number correct, I'll be back.

 

[Rich_by_the_Bay]

Help me then. I didn't save it but I remember assuming that I started by buying a $1,000,000 annuity which had a yearly income of $52k CPI-U adjusted (I think I used 2.8%) for 33 years with nothing left. The IRR was 6% on handy HP calculator.

I should redo it so I have the exact numbers before someone jumps me on being precise, but I did get a 6% IRR.

Using your numbers and the spreadsheet formula cited above, I get an IRR of 3.7%.

Sorry, but I don't think you've hit the mother lode.

 

[RockOn]

Using your numbers and the spreadsheet formula cited above, I get an IRR of 3.7%.

Sorry, but I don't think you've hit the mother lode.

I suppose not. But the income on Vanguard is $49,872 on $1 million, CPI-U adjusted single life. So you are saying a cash flow of $49,872 CPI-U adjusted on a million dollars for 33 years is not a IRR of 6%. That's what my calculator showed and I roughly checked it in a spreadsheet and got the same result. I'm not good with the formula's but I know how to get there, usually.

I'm still working at it........ My calculator just showed the IRR to be 5.94% using CPI-U adjusted cash flows with a zero remainder. I think it is correct. I'm using 2.8%/year for CPI-U adjustment to my income.

Not wanting to be a dope here, but in a spreadsheet if I assume I have $1,000,000 and make 6% each year than then start withdrawing $49872 a year (with a 2.8% yearly increase to that amount) yearly for 33 years. My account depletes to zero at the end. Isn't it correct to say that is a 6% IRR? (I am assuming I take the income at the end of the year, that makes some difference)

That isn't correct? I cannot see how I am off. In your 3.7% calc you were not including inflation adjustments, were you?

 

[Texas Proud]

Not trolling, quite serious. I was surprised the IRR on the annuity is that high.

I'm not really trying to start the 4% SWR arguement. But the annuity does seem better than I would have thought. With the 4% SWR things could blow up, the annuity has it's own risks.

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...

 

[RockOn]

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.

 

[chinaco]

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.

 

[2B]

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.

 

[mathjak107]

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

 

[donheff]

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."