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Old 08-09-2015, 06:52 PM   #41
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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.


the annuity's give you the mortality credits up front where they count .

when you think about the thread where we discussed kitces's method of increasing withdrawals basically it is opposite of what you want.

you do not want to take higher withdrawals down the road if markets do well . the reality is most of us want the opposite , we want that money early on in retirement .

that is also an spia strong point . you can have more cash flow earlier instead of first having to see if your investing can support that much years later.

there is a lot to be said for the use of spia's and your own investing . .
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Old 08-09-2015, 08:09 PM   #42
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I believe the graph in post #2 is just saying that you can spend more safely with an annuity. He's talking a single payment immediate annuity or deferred income version, which are not terrible choices. The portfolio, or bonds, can run out or not generate enough income in time. The annuity is guaranteed income for life, and about the only way to "safely" spend your last dime before you die. 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.

I suspect that Dr. Pfau is not including real-world fees in his annuity costs. He is an academic after all, not an annuity salesman. I haven't seen fees and annuity lifetime adjustments discussed in his papers. To that extent he may be somewhat optimistic. But I think he's got some good ideas here.

A few of us on this forum have discussed our "Plan B" (or higher) of buying an SPIA if our portfolio value drops to the point where our retirement is in danger but we can still afford an SPIA that covers our expenses. That ensures no portfolio remainder for the estate, but also that you will have sufficient income for as long as you live. It's a good way to safely maximize your income while you are living. I probably won't be buying any annuities before then (other than Social Security at age 70), but I'm not a bond guy either.
+1

I am one of those. I will use Fullmer's "annuitization hurdle" concept or Otar's "zone" concept to guide any annuity purchase(s). You can find more info on these approaches in other E-R threads.
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Old 08-09-2015, 08:18 PM   #43
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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 .
+1

IMO this reflects a well thought out strategy for 'couples.' It's typically the husband who's the financial lead but, not always. In either case, I believe it's wise to accommodate the financial aptitude and attitude of both people in a couple, as 'mathjak' suggests. Even it if means giving up a bit of control, and even a small bit of return, it can accomplish a greater goal.

PS: Congrats on your recent FIRE!
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Old 08-09-2015, 08:21 PM   #44
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+1



I am one of those. I will use Fullmer's "annuitization hurdle" concept or Otar's "zone" concept to guide any annuity purchase(s). You can find more info on these approaches in other E-R threads.

The timing of when to buy that annuity always gave me trouble. The chances are that you may hit that hurdle deep in a bear market for stocks. Then do u sell everything and buy the annuity? Or wait ?


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Old 08-09-2015, 08:25 PM   #45
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I have not done a comparison lately but the times I checked in the past a TIPS ladder came out favorably for us compared to an annuity, at least at our ages - government backed, inflation adjusted, no fees, liquid and the balance if we die early goes into the estate.
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Old 08-09-2015, 10:11 PM   #46
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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?
Generally speaking, insurers will invest assets backing reserves for payout annuities (which would include SPIAs) in bonds. Assets backing surplus supporting liabilities might be invested in other asset classes.
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Old 08-09-2015, 10:19 PM   #47
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[QUOTE=urn2bfree;1622546]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.

Maybe I have enough to self-insure.


Thanks for the link. I had never considered the premise of rolling down the yield curve, makes a lot of sense and gives me reason to reconsider medium term bond funds.
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Old 08-09-2015, 11:03 PM   #48
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If interest rates were higher today, annuities would make more sense to me.

I am not completely averse to them now that I am in decumulation phase, but I would not like to be locked into a law interest rate vehicle just now.

But all here know of my poor judgement.

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Old 08-10-2015, 12:07 AM   #49
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Thanks for the link. I had never considered the premise of rolling down the yield curve, makes a lot of sense and gives me reason to reconsider medium term bond funds.
For all the nice theory about gaining value by selling with an upward sloping yield curve truth is the 3-7 US treasury bond fund by I shares has returned a average of 2.59% over the last 5 years or about the same as you could have bought a 5 year treasury for in 2010, on the other hand 5 year treasuries also sold for a yield of 1.11 in 2010 so you have to be pretty well lucky on when you are "rolling" your yield curve. Probably why for last 3 years the fund has only averaged a return of 0.98%.

And that low return is what Pfau is pointing out would make investing in the annuity preferable as the standard 4 percent withdrawal would mean upon rebalancing that you would be covering for the 3% drop in your bond value from the withdrawal from your stocks.

Simple example from last full 3 years 2012 -2014:
1000K Portfolio 480 K bonds(I Shares 3-7 Treas) 480K stocks (VTI) 40 MM
withdraw 40 K
Year 2012 : Start 480 Bonds 480 VTI END 490 Bond 558.96 VTI
Withdraw 40.84K for MM and rebalance inflation 2.1 %
Year 2013: Start 504.06 Bonds 504.06VTI END 494.23 Bonds 672.67 VTI
Withdraw 41.45K for MM and rebalance Inflation 1.5%
Year 2014 Start 562.73 Bonds 562.73 VTI END 580.39 Bonds 633.30 VTI
Withdraw 42.03 Inflation 1.4%
Start 585.83 Bonds 583.83 VTI

Now if instead you use Wade's 5.37% for Joint and Survivor annuity in place of the 500K bonds (and I believe it was closer to 6.24 % back in 2012 but anyway) you get $26,850 per year payout meaning you need $13,150 in MM start of year:
Start 2012 13.15MM 486.85 VTI End: 566.94 VTI
Withdraw 13.99 (40.84 - 26.85 Annuity)
Start 2013 552.95 VTI End: 737.91 VTI
Withdraw 14.60 (41.45 - 26.85)
Start 2014 723.31 VTI End: 814.01 VTI
Withdraw 15.18 (42.03 - 26.85)
Start 2015 798.83 VTI

And you can see in just 3 years even though you bought the annuity with the bond portion of your portfolio, the lower withdrawal rate and lack of needing to replenish a bond fund that with present yields will underperform the withdrawal rate you have 35% more invested in stocks by the start of 2015 than in the standard 50/50 portfolio. And you have 68.03% of the value of the standard portfolio.

http://www.etfreplay.com/etf/vti.aspx
https://www.ishares.com/us/products/...asury-bond-etf
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Old 08-10-2015, 03:55 AM   #50
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yep , it is the delaying of selling equities because the annuity has a higher draw rate that gives it the income edge.

a good portion of what you get in an spia is mortality credits from the dead bodies and while rates matter ,your age and mortality credit make changes in rates not all that big of a deal.

you can ladder the annuity's , that way at this stage you stand a chance of catching the higher rate , the mortality credit and the age increases.

i think around 70 is the sweet spot to start looking in to this for my final structure . i am 62 now .
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Old 08-15-2015, 06:46 AM   #51
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Those that do have SPIAs or are not entirely averse to having, would you have recommendations for a low-cost provider? I’m thinking of a purchasing a SPIA or perhaps a DIA (5-year deferred) from ImmediateAnnuities.com soon.
Thanks for your suggestions, jfb
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Old 08-15-2015, 06:49 AM   #52
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they would be my choice
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Old 08-15-2015, 08:15 AM   #53
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Those that do have SPIAs or are not entirely averse to having, would you have recommendations for a low-cost provider? Iím thinking of a purchasing a SPIA or perhaps a DIA (5-year deferred) from ImmediateAnnuities.com soon.
Thanks for your suggestions, jfb
As I indicated above, I've searched rates thoroughly over the last five or six years and have bought a number of SPIA's. I've bought a few through immediateannuities.com and also through Vanguard. Recently I have found Vanguard offers the best rates because of their reduced commission.
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Old 08-15-2015, 08:29 AM   #54
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I’m thinking of a purchasing a SPIA or perhaps a DIA (5-year deferred) from ImmediateAnnuities.com soon.
Thanks for your suggestions, jfb
If buying these, and depending on my situation, I would also consider:
- Buying them over time rather than all at once (rates will probably not be going down, but could be going up).
- Buying several from several highly-rated issuers rather than a single SPIA from one company. If there's no "volume discount", then getting diversification at zero cost seems prudent.
-Assuming these annuities are providing money for my "must have" spending, I would only consider an SPIA with payouts linked to inflation
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Old 08-15-2015, 08:48 AM   #55
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I would only consider an SPIA with payouts linked to inflation
I would have to disagree with this statement. For one thing, you pay a very high price for inflation protection in an SPIA. Secondly, an SPIA can be viewed as fixed income with the inflation protection being achieved through an equity portfolio. That's the way I view my situation.
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Old 08-15-2015, 10:42 AM   #56
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Plus, there are not that many inflation adjusted annuities out there other than delaying SS.

While I agree that with a higher guaranteed source of income that one can increase investment risk/volatility and have the increased equities serve as a hedge to inflation, I wonder how many people actually do that.
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Old 08-15-2015, 10:52 AM   #57
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Plus, there are not that many inflation adjusted annuities out there other than delaying SS.

While I agree that with a higher guaranteed source of income that one can increase investment risk/volatility and have the increased equities serve as a hedge to inflation, I wonder how many people actually do that.
+1 Buying annuities is kind of going in the opposite direction of taking on more investment risk (although in reality, you did).
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Old 08-15-2015, 11:21 AM   #58
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I would have to disagree with this statement. For one thing, you pay a very high price for inflation protection in an SPIA.
Agreed, SPIAs with inflation protection appear to be expensive. But if the SPIA is being purchased expressly to fund "must have" nondiscretionary spending, it seems problematic to count on the other part of the portfolio for a big part of that necessary income. While it might start out small, the loss of purchasing power of the annuity payout could be significant over time (e.g. a loss of 50% over 15 years if inflation is just 5%). So, if we implicitly accept that the portfolio can be counted on to cover 50% (and eventually more) of the "must have" expenses, maybe we should just count on the portfolio to fund the whole thing and save a lot of costs/fees/loss of flexibility we get with an annuity.

We should ask ourselves why insurance companies need to reduce present annuity payouts so much if future payouts are adjusted for inflation. Answer: Because inflation is real, might get a lot worse, and hedging against it in an ironclad way ain't cheap.

Many people buy annuities to have a worry-free way of paying for their basic expenses. If they buy one without payout increases for inflation, then they've just traded worries--instead of fretting about the S&P 500 ups and downs, they get to worry about the CPI. And CPI has a much steadier record of staying on the "wrong" side of zero.
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Old 08-15-2015, 01:12 PM   #59
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For one thing, you pay a very high price for inflation protection in an SPIA.
How do we define "high price" in that statement?
I might look at TIPS vs. regular treasuries and see if the SPIA rates reflect that difference, but I've never attempted that.
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Old 08-15-2015, 02:23 PM   #60
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As I indicated above, I've searched rates thoroughly over the last five or six years and have bought a number of SPIA's. I've bought a few through immediateannuities.com and also through Vanguard. Recently I have found Vanguard offers the best rates because of their reduced commission.
Bruce
vanguard is okay for deferred annuity's , they are not the place for immediate annuity's . the best combo is the immediate ammuity non inflation adjusted and your own equity investing .
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