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Old 08-09-2015, 05:54 AM   #21
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the answer is you can't invest in the diversification the insurer can to pay that higher draw rate.

they have dead body's to invest in , lots of them , you do not.

those who die pay for those who live .

in either case your money in bonds and cash will be gone.

at 1% on cash and 3% on bonds trying to duplicate that level of cash flow to hold off selling equity's would be tough .

you would have a balance of zero in cash and bonds if you delayed refilling x-amount of years down the road so whether you spend those portions to zero or you give it to the insurer in either case you don't have it any more .

however the guaranteed draw from the insurer will form a base requiring less equity selling .

you will not have that on your own .

the danger now is if rates rise you will need to liquidate bonds at a loss to keep up that cash flow or else sell more equity's to compensate .

the real difference is bonds and cash have an roi up front that eventually hits zero as you spend it .

the annuity has zero roi up front since basically it is your own money given back to you at a higher cash flow then you can take , then once you get it all back the annuity roi begins and gets higher and higer as you live.

but that isn't the magic , the magic that usually has an spia/ equity's beat bonds/cash /equity's is the fact not so much powder has to be kept dry for sequence and market risk and the higher cash flow allows less frequent or less selling of equity's leaving them to grow longer .


cd's have the same commission over time as the spia does , like the cd the fees are in the rate .

in fact hold a bond fund for a few decades and see what even low cost ones add up to , where as with annuity products like an spia that is all figured in to the rate . i bet vanguard total bond over 25-30 years comes pretty close if not more than the expenses on the spia .
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Old 08-09-2015, 06:04 AM   #22
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pfau is a researcher he sells nothing.
I thought this was pretty funny. Researchers are constantly selling their ideas, data, and results (with skewed data in many cases). When looking at research it's good to know where they got their funding to understand their perspective. Statistics can be skewed to present any result the client wants, especially if it means another grant or contract to support the client's product.
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Old 08-09-2015, 08:01 AM   #23
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I thought this was pretty funny. Researchers are constantly selling their ideas, data, and results (with skewed data in many cases). When looking at research it's good to know where they got their funding to understand their perspective. Statistics can be skewed to present any result the client wants, especially if it means another grant or contract to support the client's product.
Former researcher here.

As far as I know public funding does not determine outcomes, but it does influence what gets investigated.

Frequently it ends up being a game: You repackage what you want to research or already are researching into the "fad of the grant year".

For example in ICT, suddenly distributed computing becomes "cloud computing", and wireless low power networks becomes "the internet of things". Grant bodies are happy, research institution merrily goes on doing what they already were doing.

I have never seen anyone steering or adjusting results though because it went against the (perceived) agenda (political or otherwise) of the granting entity.

No idea how that transfers to private funding - but we all remember tobacco funded research 'proving' no link with lung cancer. So in that case we all could rightfully be suspicious.
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Old 08-09-2015, 09:18 AM   #24
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I thought this was pretty funny. Researchers are constantly selling their ideas, data, and results (with skewed data in many cases). When looking at research it's good to know where they got their funding to understand their perspective. Statistics can be skewed to present any result the client wants, especially if it means another grant or contract to support the client's product.
I recall attending a meeting (when I was still working) where a consultant (trainer) was providing us with insight as to what he was going to teach our distribution channels. Some were company held and others were independent. It was mostly about improving one's bottom line through streamlining and working the areas where money could be saved. Since we were (in a round-about-way) acting as a middleman, buying in bulk and redistributing (for profit) to our distribution network - working one's vendors successfully, which is a significant area for improvement/savings to add to one's bottom line was not addressed. So yes - information may be skewed to be favorable to the one who pays you.
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Old 08-09-2015, 09:42 AM   #25
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as far as his use of life insurance , it is a far better deal not to buy a joint annuity with a spouse is what he said. you are better off taking the difference between a single annuity instead of a joint annuity and buy life insurance instead.

the life insurance is tax free , the annuity is not .

sure , if you are a skilled investor and the market gods and sequence of risk gods smile on you , you can come out a head on your own . but under average conditions the insurance / investing will always provide a higher initial income and a pretty good chance of a bigger pile at the end
This is off topic for this thread. But, I guess I'm the one who introduced it so I should make some comment.

I agree with what you said about SPIAs vs. bonds.

However, I don't buy Pfau's claim that whole life insurance plus a single life SPIA beats term life plus a joint life SPIA.

There was a thread on his article in the Bogleheads forum. He joined in and corrected some simple communication problems. However, he did not address all the substance. On Saturday, May 16 he wrote
"On Monday, I'll make charts for this 0% fee case." He did not come back to that thread. I'll assume the numbers didn't work out like he expected.
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Old 08-09-2015, 09:45 AM   #26
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i saw that too and wondered about the update .

he did sy it beat it 67% of the time , not 100% and i can see that , especially if sequence risk and market risk are not the greatest .

but we still want to see those updated numbers .
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Old 08-09-2015, 09:52 AM   #27
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Maybe I have enough to self-insure.
.
This may be the key. Many people here have enough money that they don't see any meaningful longevity risk. No reason to pay an insurer to assume an uncertainty that's not significant to me.

Of course, that's not true about everyone.
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Old 08-09-2015, 10:02 AM   #28
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i agree however planning for my wife is another story.

eventually we will migrate to some insurance products.

she wants the security if i am not here of a pay check at least covering essentials.

she was a widow once already so she does not want a complex pile of investments dropped in her lap .

many wives feel that way . while the husband is into investing and index's and allocations they are not.

they have the proverbial image of a homeless bag lady in their head who has out lived her money.

while 80% of all married men die married , 80% of all married women die alone as well as live longer.

so while most of us men feel we don't need no stinkin insurance products you really have to consider the wife factor in the equation too.

locking in non descretionary spending in to a pay check and then using simple investments like wellesley for inflation protection and the wants may be a very comfortable idea to her .

it can also be the reverse in some relationships but the longer longevity of women usually creates additional issues .

i just retired last week so for now i do all the investing but i can see in a decade or so migrating some money over .
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Old 08-09-2015, 10:05 AM   #29
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pfau is a researcher he sells nothing.
Phau works for The American College. It is supported by and provides courses for the finance industry. It is "accredited" by The Middle States Commission on Higher Education. This is not to be confused with the Middle States Association of Colleges and Schools which is one of 6 regional accrediting organizations for colleges. I think it would more clear to say he is a researcher in support the financial community that certainly does sell financial goods and services.
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Old 08-09-2015, 10:07 AM   #30
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but many times he goes against various types of products they sell as well .

to quote pfau on variable annuity's

"But after examining historical data, Pfau found that these products don’t provide guarantees of any real value. One, the withdrawals decrease on an inflation-adjusted basis.

“Prospective retirees may be overvaluing the guarantees in their mind because they are not properly considering how inflation will erode their real value over time,” he wrote in his paper. “In behavioral economics, this bias is known as money illusion. People can logically understand the effects of inflation, but their emotional responses and decisions remain attached to nominal values.”

two: retirees could do better using a plain-vanilla systematic withdrawal plan. "
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Old 08-09-2015, 10:37 AM   #31
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Former researcher here.

As far as I know public funding does not determine outcomes, but it does influence what gets investigated.

Frequently it ends up being a game: You repackage what you want to research or already are researching into the "fad of the grant year".

For example in ICT, suddenly distributed computing becomes "cloud computing", and wireless low power networks becomes "the internet of things". Grant bodies are happy, research institution merrily goes on doing what they already were doing.

I have never seen anyone steering or adjusting results though because it went against the (perceived) agenda (political or otherwise) of the granting entity.

No idea how that transfers to private funding - but we all remember tobacco funded research 'proving' no link with lung cancer. So in that case we all could rightfully be suspicious.

Not to defend the tobacco companies... but they were using artful words like some politicians....

I think they were saying that no causal proof to lung cancer... there was plenty of circumstantial evidence to prove it, but no 'smoking gun'.... (pun intended)... I have not looked, but wonder if this still holds up or not...
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Old 08-09-2015, 10:52 AM   #32
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f I have $1M in bonds, why should I give it over to an insurance company, pay them a fee and a sales commission and allow them to take the remaining money and invest it in bonds to pay me money, when I can just invest in bonds myself.
Are insurance companies limited to just investing SPIA $$'s in bonds?

I was under the impression that insurance companies invest in many things: bonds, stocks, commercial real estate, commodities, etc. Am I wrong?
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Old 08-09-2015, 11:21 AM   #33
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<snip>
she was a widow once already so she does not want a complex pile of investments dropped in her lap .
<snip>
i just retired last week so for now i do all the investing but i can see in a decade or so migrating some money over .

Good points.

And may I add that any man or woman who lives long enough may suddenly realize that he/she no longer can manage the investment very well. For most of us our cognitive powers and energy decline with age. A simple investment strategy with a comfortable guaranteed floor and somebody else balancing things for additional income would be very desirable.

Also, FWIW, it's hard to swindle an older person out of money that's been annuitized.
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Old 08-09-2015, 11:21 AM   #34
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i agree however planning for my wife is another story.

eventually we will migrate to some insurance products.

she wants the security if i am not here of a pay check at least covering essentials.

she was a widow once already so she does not want a complex pile of investments dropped in her lap .

many wives feel that way . while the husband is into investing and index's and allocations they are not.

they have the proverbial image of a homeless bag lady in their head who has out lived her money.

while 80% of all married men die married , 80% of all married women die alone as well as live longer.

so while most of us men feel we don't need no stinkin insurance products you really have to consider the wife factor in the equation too.

locking in non descretionary spending in to a pay check and then using simple investments like wellesley for inflation protection and the wants may be a very comfortable idea to her .

it can also be the reverse in some relationships but the longer longevity of women usually creates additional issues .

i just retired last week so for now i do all the investing but i can see in a decade or so migrating some money over .
Retirement is as unique as the individual himself. Much too much information about retirement is placed into generalities, and probably causes more confusion than clarity. Keeps places like Yahoo finance profitable with daily articles. Also keeps people in the industry like Wade Pfau happily employed.

Not all the information put out for perusing is completely accurate. Some is meant to intentionally drive those light in financial expertise, straight into the arms of those willing to help them (and possibly help themselves as well). There are many good people out there, but there are some who do not always act in your best interest.

We retired at 58/56 and have been retired for +5 years now. We are fortunate to have saved/invested well, and live comfortably off them in retirement (no pensions or annuities). Don't see us buying any annuities, but not opposed to SPIAs - which get inflicted with the same bad press as the other no-so-great types of annuities.

I am the financial person in our marriage, and yes, my wife has zero interest in managing our finances. It's not that she can't (she was a banker), she just leaves it to me. This is troubling and I have had to figure out a way to insure that things will roll along as they are now for the rest of her life. This applies to me as well, as I'm pretty sure that somewhere along the way, I'll lose my financial edge and won't know it.

I have our investments set @ 52/48 stock/bond for growth and to automatically rebalance and pay out a nice stream of income for the both of us until it's no longer needed (Balanced Funds - the most underrated retirement investment vehicle IMHO). It should last for the rest of our lives and then automatically be passed along to our daughters. Our agreement is that when we notice we're no longer as sharp with our finances, our daughters will take over for us. When one of us passes, our daughters will be advised of our financials and to take over when necessary. There is also a written "what to do when" document for my wife/them when the time comes. Works for us, but as I said upfront - retirement is as unique as the individual himself.
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Old 08-09-2015, 12:56 PM   #35
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Are insurance companies limited to just investing SPIA $$'s in bonds?

I was under the impression that insurance companies invest in many things: bonds, stocks, commercial real estate, commodities, etc. Am I wrong?
Life insurers can invest in a lot of things, but the economics push them into things with stable values.

States require some "surplus", which is just the excess of assets over liabilities.

How much surplus depends on how much risk the company is absorbing.
For the investment risk, the statutory "Risk Based Capital" formula uses a much higher multiple for stocks than for bonds. IIRC, the base is 30% for stocks and 1-2% for investment grade bonds. Furthermore, the company needs to maintain that assets minus liabilities cushion at the end of every accounting period (at least annually, but maybe quarterly). So, if you're holding lots of stocks, and stocks went down recently, the "assets" side is down, but you still need the same cushion.

Generally, stockholders don't want to tie up all that capital. If the company is calculating some return on capital to demonstrate good performance, surplus is a drag. Bonds reduce your capital requirements and allow a better ratio of profits to capital.
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Old 08-09-2015, 02:33 PM   #36
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This is as the best answer I have yet seen...not entirely satisfactory, but closer to convincing me. My main question was that if I have $1M in bonds, why should I give it over to an insurance company, pay them a fee and a sales commission and allow them to take the remaining money and invest it in bonds to pay me money, when I can just invest in bonds myself.

The reasons I remain skeptical of paying the middle man to take the sequence of returns risk is that a bad sequence of returns CAN wipe out insurance companies, too. Also as Pfau's buddy and some time co-author, Michael Kitces, recently pointed out, bond fund holders of shorter duration bonds can be just fine even in the supposedly terrible forthcoming rising-rate environment,

https://www.kitces.com/blog/how-bond...nterest-rates/

so the boogie man of an economic storm wiping out my money before I die just seems either unlikelier or at least a similar threat to the annuity companies as it is to me.

I agree. The benefit of annuities vs bonds is all the dead bodies (nice phrase mathjack ). One of the reasons that annuities aren't too interesting to this crowd, is that the dead bodies don't really start to pile up until people hit their 70s.

I also have the same fear you do in in an economic storm taking out insurance companies.

It seems to me that one of most likely bubble we are going to have in the next decade is a bond bubble. The massive amount of liquidity injected into the world economy is certainly a key ingredient. Moreover the massive debt pile up by the developed economies gives government a strong incentive to increase inflation. Now obviously I and many other have been wrong about this for years, but I don't think the economic fundamentals have changed.

The big holders of bonds are insurance companies.
One of thing that struck me reading lots of books about the financial crisis is the pretty low sophistication of life insurance companies.

Michael Lewis and Aaron Sorkin were both pretty harsh on them. Consequently they got stuck holding lots of AA and AAA rated CDO, CDO^'2 CMO an all the other crazy products. Companies like Goldman Sach held very little before the prices collapsed and a few hedge funds made money (The Big Short). About the only group of investors that were less sophisticated than insurance companies were city and county treasurers. What saved insurance companies was their lack of leverage and the rise in the value of treasury and high grade corporate.

My other area of concern is that insurance are regulated at the state level. With 50 points of failure this really increases the risk of incompetence or bribery.
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Old 08-09-2015, 04:37 PM   #37
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An SPIA's cost is determined by a pooled "average" lifespan, so if you live extra long, you get extra value. With portfolio withdrawals you have to allow for the possibility of an extra long lifetime, reducing your income from what you could have spent if you knew you would live to the average lifespan. And most likely leaving some of your portfolio to your estate instead of spending it all.
The benefit of a SPIA is that you get the pooled coverage. If I didn't have pension income to cover required expenses, I would think harder about one. I would have to buy direct from the company, to cut out commissions.

On the other hand some of our posters bought rental real estate to get a monthly check, and I also have the same. You get the check as long as you need, and have the house left when ever you need the cash or to your estate. It is better to have 3 or 4 and to pay someone to manage but you I get a check each month without the guarantee.

Just my view.
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Old 08-09-2015, 05:04 PM   #38
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except as a landlord i can tell you :

you don't have to evict an annuity and get no rent and have legal fees .

an annuity does not complain the toilet is stuffed at 1:00am

the annuity check keeps coming even as you are out looking for a tenant

you don't have to renovate or repair damage to an annuity.


they are clearly not even close to being an equal.

you may as well consider a part time job the equivalent because that is what real estate is .
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Old 08-09-2015, 05:35 PM   #39
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Good points.

And may I add that any man or woman who lives long enough may suddenly realize that he/she no longer can manage the investment very well. For most of us our cognitive powers and energy decline with age. A simple investment strategy with a comfortable guaranteed floor and somebody else balancing things for additional income would be very desirable.

Also, FWIW, it's hard to swindle an older person out of money that's been annuitized.
This is the main reason I might consider buying an spia one day. The parents of a good friend of mind blew their entire savings at a casino over the last few years. I knew his parents, his dad was an engineer and his mom appeared as level headed as they come. But when they reached their 80's, they became bored and headed to the slot machines. My friend thought they were just going for the food and playing nickle slots. Turns out they were playing $5 slots.

I'm sure most here can't imagine that happening, but you just never know. I'm not planning to turn a high percentage of my savings over to an insurance company, just enough to supplement SS to meet essential expenses.
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Old 08-09-2015, 05:41 PM   #40
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usually one spouse is the investor and the other goes along for the ride.

what the bogleheads of the world forget is most folks have no interest in investing as a hobby .

many , especially our wives would rather have that pay check in their account then have their income solely based on the market gods jut because their husbands felt they could get an extra point or two .

just something i am focused on since my wife lost 1/2 her savings before i met her because she trusted the broker at her bank to put her in the right investments.

he threw her in tech and dot coms .
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