anybody else in Vanguard/AIG SPIA ?

[JohnEyles]

I don't want to start another annuity jihad ...

But I signed up for the AIG SPIA being offered through
Vanguard, back in April or so, with quarterly payments
and CPI adjustment (I was 54yo and initial payout was
4.4% of principal, for the record).

Anyhow, just received first payment with CPI increase,
and it's 2.07%. Been poring over the CPI numbers at:
ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt
and can't quite figure out how they came up with a
number that low.

Anyone else got one of these puppies ?

 

[chinaco]

Call them and ask.

It should be spelled out in the contract.

 

[donheff]

The Federal retirement COLA was 2.3 percent, determined by computing the percentage increase in the Consumer Price Index (CPI) for urban wage earners and clerical workers from the third quarter average of 2006 to the third quarter average of 2007, as provided by the U.S. Department of Labor, Bureau of Labor Statistics. The full COLA only goes to workers who are in for the full twelve months.

Some possibilities for you. Maybe you got prorated since you were not in the full twelve months. Maybe your calculation period is calendar year, not third quarter average. Maybe both. Maybe a different CPI index?

 

[JohnEyles]

The Federal retirement COLA was 2.3 percent, determined by computing the percentage increase in the Consumer Price Index (CPI) for urban wage earners and clerical workers from the third quarter average of 2006 to the third quarter average of 2007, as provided by the U.S. Department of Labor, Bureau of Labor Statistics. The full COLA only goes to workers who are in for the full twelve months.

Some possibilities for you. Maybe you got prorated since you were not in the full twelve months. Maybe your calculation period is calendar year, not third quarter average. Maybe both. Maybe a different CPI index?

Silly me, I didn't even look at the contract before I posted. They
say it's adjusted every Jan 1. That still doesn't exactly spell it
out. I'll call 'em.

 

[JohnEyles]

Silly me, I didn't even look at the contract before I posted. They
say it's adjusted every Jan 1. That still doesn't exactly spell it
out. I'll call 'em.

Finally called 'em on this, turns out since I got the thing in April,
I only got 3/4 of the CPI increase, which is computed on the September
to September numbers. Fair, I guess. (I had originally asked why
my 2008 payment is only increased by 2.07%).

I also asked about how much of my after-tax basis I got to take
out each year (the tax-free portion of the annuity payments) and it
turns out they're giving me a life expectancy to age 85. Wow.

 

[Rich_by_the_Bay]

John, that sounds like a pretty good product for "cash replacement." Higher payout than I would have thought for such a relatively young buyer.

May I ask how you see it fitting into your strategy? That is, are you passing it straight through for living expenses, or re-investing? Post-tax or qualified purchase money? Just curious.

 

[twaddle]

Don't they give you a 1099 or something each year? Does that tell you how much was return of capital?

Does Vanguard disclose the fees on the SPIA? I remember they do for their variable annuities, but I don't recall them spelling it out for the SPIAs.

 

[brewer12345]

Does Vanguard disclose the fees on the SPIA? I remember they do for their variable annuities, but I don't recall them spelling it out for the SPIAs.

There generally is no explicit fee for a SPIA. Its an insurance policy you bought from an insurer.

 

[twaddle]

There generally is no explicit fee for a SPIA. Its an insurance policy you bought from an insurer.

Vanguard is usually good about disclosing implicit fees, so I was wondering if they do for their SPIAs. I assume they get a kickback from AIG, and AIG must also calculate some sort of internal spread, right?

 

[brewer12345]

Vanguard is usually good about disclosing implicit fees, so I was wondering if they do for their SPIAs. I assume they get a kickback from AIG, and AIG must also calculate some sort of internal spread, right?

I would imagine that AIG gives Vanguard a commission, just like they pay all of their annuity salesmen. All the rest is internal to AIG. Since we are talking about Vanguard, I would guess that they have agreed to a lower commission in return for a more generous product.

 

[FinanceDude]

I would imagine that AIG gives Vanguard a commission, just like they pay all of their annuity salesmen. All the rest is internal to AIG. Since we are talking about Vanguard, I would guess that they have agreed to a lower commission in return for a more generous product.

Probably, since Vanguard doesn't have to pay an annuity salesmen, the commissions get "absorbed" into the bottom line........

SPIA's shouldn't have much in costs..........

 

[JohnEyles]

May I ask how you see it fitting into your strategy? That is, are you passing it straight through for living expenses, or re-investing? Post-tax or qualified purchase money? Just curious.

It was money from a (relatively low-cost) after-tax annuity I had at
TIAA-CREF. Less than 10% of my egg. About half after-tax and
half gains.

The plan was to just use it for living expenses. But this year I took on
two consulting jobs both of which turned out to be WAY larger than
I'd thought, so I'm actually adding to my egg, not subtracting.

 

[JohnEyles]

Don't they give you a 1099 or something each year? Does that tell you how much was return of capital?

Sorry for the confusion. Yes, they DID send a 1099 with only a portion
shown as taxable. My question was on how they got from the dollar
figure of my after-tax basis in the premium paid, to a number to
consider return-of-capital each year. I thought it was a little low
and that maybe the tax-free fraction would stay constant as the
payment increased with CPI. But no, the tax-free amount stays
flat. Turns out their tables expect me to live to 85yo. Seems unfair,
because if I live beyond 85yo, it suddenly ALL becomes taxable (since
all the original basis will have gotten taken out), but if I die early, too
bad !

Does Vanguard disclose the fees on the SPIA? I remember they do for their variable annuities, but I don't recall them spelling it out for the SPIAs.

I think fees are meaningless on a SPIA, at least from the consumers
standpoint. I get paid what I contracted to get paid, period.

 

[FinanceDude]

Sorry for the confusion. Yes, they DID send a 1099 with only a portion
shown as taxable. My question was on how they got from the dollar
figure of my after-tax basis in the premium paid, to a number to
consider return-of-capital each year. I thought it was a little low
and that maybe the tax-free fraction would stay constant as the
payment increased with CPI. But no, the tax-free amount stays
flat. Turns out their tables expect me to live to 85yo. Seems unfair,
because if I live beyond 85yo, it suddenly ALL becomes taxable (since
all the original basis will have gotten taken out), but if I die early, too
bad !

They use an exclusion ratio that creates a formula of how much is return of principal, and how much is taxed as ordinary income.

I think fees are meaningless on a SPIA, at least from the consumers
standpoint. I get paid what I contracted to get paid, period.

Much like fixed annuities, which have no M&E charges. After all, you are paying a LUMP SUM to guarantee futre benefits, that's not that hard for the insurance company to figure out payments on........it's all actuarially based........

 

[twaddle]

I think fees are meaningless on a SPIA, at least from the consumers standpoint. I get paid what I contracted to get paid, period.

Right, but how do you know if what you're being paid is fair unless you have more information about the costs?

FWIW, it sounds like an OK deal. They expect you to live 30 years, and they're paying you an inflation adjusted 4.4%, which includes your return of capital.

If you did the same thing with TIPS with a coupon of 2%, you'd get almost the same 30-year SWR: 4.46%.

So, it's sort of like you're getting the insurance element for free, but I assume that the insurance company is betting on higher returns than a pure TIPS portfolio....

 

[JohnEyles]

They use an exclusion ratio that creates a formula of how much is return of principal, and how much is taxed as ordinary income.

In this case it's not exactly a ratio, since (according the phone guy)
the exclusion will stay flat as the payment adjusts upwards, thus
the ratio will decline.

 

[FIRE'd@51]

Right, but how do you know if what you're being paid is fair unless you have more information about the costs?

FWIW, it sounds like an OK deal. They expect you to live 30 years, and they're paying you an inflation adjusted 4.4%, which includes your return of capital.

If you did the same thing with TIPS with a coupon of 2%, you'd get almost the same 30-year SWR: 4.46%.

So, it's sort of like you're getting the insurance element for free, but I assume that the insurance company is betting on higher returns than a pure TIPS portfolio....

Of course, the credit risk with an AIG product is higher than that of a TIPS, so that's implicitly part of the fee.

Also, you're not really getting the longevity insurance for "free" since, if you die early, your payments stop.

 

[twaddle]

Prudential issues a CPI-indexed bond, so we can get a better handle on the "costs."

PFK has a price-adjusted real yield of 3.6%, which would give you a 5.4% 30-year SWR. So, based on this rough metric, you're giving up 1%/year for the insurance. Still not a terrible deal, IMO.

 

[haha]

So, it's sort of like you're getting the insurance element for free, but I assume that the insurance company is betting on higher returns than a pure TIPS portfolio....

Why would this matter?

Prudential issues a CPI-indexed bond, so we can get a better handle on the "costs."

PFK has a price-adjusted real yield of 3.6%, which would give you a 5.4% 30-year SWR. So, based on this rough metric, you're giving up 1%/year for the insurance. Still not a terrible deal, IMO.

I have this bond. For some reason it has gained in market price over the last few months.

Ha

 

[twaddle]

It doesn't matter unless you can somehow roll you own. Or if you can convince somebody to start my dream org: a non-profit mutual fund company that issues annuities to ERs.

 

[FIRE'd@51]

I have this bond. For some reason it has gained in market price over the last few months.

The reason is the same one that has caused TIPS to appreciate - real rates have come down dramatically.