Financial Rules of Thumb & When to do

[rescueme]

Interest rates may have dropped a bit since this article was written.

It quotes $7,397 a month on that million for a 66 yr old M, for Illinios I got $6,499 a month as a quote today.

Interest rates on an SPIA change as frequently as each week; that was the case for me/DW when we purchased ours.

Rates changed within a week of our completed application being received. Since the policy had yet to be issued, we completed another application (overnight) to take advantage of the slightly better rate.

Also, be aware that depending on your requirements there are several options that will increase/decrease your monthly income.

Apply for an SPIA later in life? Your payment goes up.

Apply for an SPIA that has a guaranteed term (e.g. payments continue to your estate, even if you die)? Your payment goes down.

Apply for an SPIA that is inflation adjusted (few offered), but the initial payment will usually be lower than a standard non-adjusted SPIA.

You really need to understand the type of SPIA, or if an SPIA will even make sense in what you want to do. For us, it primarily provided a "pension" until we draw full SS. Payments after that time will certainly be worth less (due to inflation) but then again, we delayed filing and "upgrade" to a superior inflation adjusted product, e.g. SS. Payments will continue after that time and will just be icing on the cake (along with reducing the impact of excess RMD's in the future).

There is no "standard answer" when talking about SPIA's. You need to determine if you need one, along with a policy (if you find you do) that meets your persional retirement income and RMD plans.

 

[KingB]

Can you give me a brief differences between SPIA and EIA/FIA? Or a link to it?

 

[rescueme]

Can you give me a brief differences between SPIA and EIA/FIA? Or a link to it?

Bob has a decent amount of info on his site:

Annuities: A Primer

I just saw this article, as related to the current discussion:

http://www.kiplinger.com/features/archives/krr-create-a-paycheck-with-an-annuity.html

 

[brewer12345]

Can you give me a brief differences between SPIA and EIA/FIA? Or a link to it?

SPIA: you give the insurer a lump sum which you can never get back. In return you get a stream of payments which can last for a set term, for your life, or for the longer of your and you spouse's life. Variants include payouts with an inflation or regular annual (e.g. 3%) increase, and payouts that last for a minimum amount of time even if you drop dead before the end of the specified period. SPIAs are best for hedging longevity risk (the risk that you outlive your assets).

Indexed annuities: you give the insurer a lump sum and in return your account can earn a small amount of interest annually based on a very complicated formula that depends on equity index movements. At some point down the road you can annuitize the value of your account (basically swap it for a SPIA). These contracts are vastly more complex than a SPIA and typically have larege penalties for early surrender for several (up to 10+) years. Index annuities are good for .

SPIAs are really a decumulation product best suited to older people (60+). Index annuities are fearsomely expensive, overly complicated accumulation products best suited to generating outsized commissions for insurance salesmen.

Note that both of these products are general account policyholder obligations of insurers and as such are at risk if the insurer blows up. If you have any serious intention of buying one, look very carefully at the financial strength of the issuer.

 

[67walkon]

My brain disagrees with the article. The article talks about a man taking an annuity at age 66 and living 30 years. But your life expectancy at 66 is more like 15 years, isn't it?

$6,499 x 12 = $77,988. Call it a 7.8% return, but it is a return of principal and on principal. Part of it is your money coming back to you. If you die after 15 years, you receive a total payout of $1,169,820, which is barely 1% per annum.

On the other hand, if you get 5.5% on your million, you only get $55,000 a year, but it is a real 5.5% per annum because you still have the million when you die at age 81.

If you made up the difference between $78,000 and $55,000 each year (out of your million if you chose bonds), my magic spread sheet tells me you would run out of money at age 88. I guess the annuity is basically insurance against living too long.

However, having always lived below my means and not being able to imagine any other way, I would give up the extra $23,000 a year and keep my million bucks. That, of course, assumes I can afford to do so, which I can.

Thanks for making me think about this. My goal is still to have enough in a very diversified portfolio, heavily weighted to tax free bonds with some equities, to generate enough to live on, assuming a reasonable personal inflation index with no mortgages and no debt. Our children will be happy when we die. Unless we leave it to charity!

 

[rescueme]

The article talks about a man taking an annuity at age 66 and living 30 years. But your life expectancy at 66 is more like 15 years, isn't it?

I have no idea how long I/DW will live (and we're 63). That's why our retirement income plan goes to age 100.

Unless you are willing to accept the "S&W Solution", you really don't know how long you will live, do you?

Me? I'd rather plan for the outlier age to ensure I/we have enough to meet our needs and support our chosen lifestyle, for the rest of our days regardless if it is 30 years or 30 seconds. If there is $$$ "left over"? So be it. We also made plans for that situation, if it were to occur.

Personally, I'd rather die with money than live without it, and plan accordingly ...

 

[teejayevans]

There have been a number but they have been small(ish) and were generally not highly rated to begin with so it was not a shock that they finally fell over.

and I heard from a FA that their annuities where taken over by other insurance companies, so nobody has lost money with a annuity, not that it can't happen.
TJ

 

[brewer12345]

and I heard from a FA that their annuities where taken over by other insurance companies, so nobody has lost money with a annuity, not that it can't happen.
TJ

Often that happens, but not always and nothing is guaranteed.

 

[meierlde]

Note it is possible if your unhealthy to get your effective age adjusted upwards for an SPIA, thereby increasing the payout. Its sort of the inverse of the old life insurance physical, where being unhealthy increased the premiums, both make sense because being unhealthy for life insurance means the insurance company is likley to pay out earlier than assumed, and for a life annunity to have to pay less than assumed. I suspect that if you have a pre-existing condition disqualifying one from health insurance, one should try this.