Your thoughts on SPIA

[ERsoonihope]

Hi. DW and I are both 60 this year. That's not really such an ER, I know..but that is where we are. I think we have a situation where a SPIA makes sense - but I've been lurking on here quite a while, and I know there are a number of folks with strong feelings about annuities. Thought I'd lay out our situation, and see what I'm missing.

Total invested assets are about $1M. We're both working full time now, and both making good salaries. We also have income from a early retirement I took a few years back - that is a pension of $42 K annually - no COLA - but it does have a 75% survivor benefit.

So on to my SPIA question. DW has worked for same employer her entire career. Her retirement plan is basically a 401K. She has a variety of options on retirement. She needs to pick one of the options (or mix and match among them) at the time she accesses those funds. Her retirement account totals $500K (making up half of our total invested assets). One of the options is to buy a SPIA.

$500K will buy an annuity from the plan with a 2.5% annual COLA and a 70% survivor benefit that pays $35,000 annually. That seems like a good deal to me - better than investing it and planning on a 4% withdrawal. I understand that the money is gone once we buy the annuity ... but we're planning to live to our eighties at least - and think we have a chance at being successful at that.

If we do buy the SPIA with her retirement, we'll have two retirement incomes ($35 K from hers, $42 K from my previous employer). We'll have $500K invested assets still. And eventually we'll have social security.

If I run it through Firecalc, I get like a 90% answer when I go the annuity route. If I don't go the annuity route, and instead add her retirement into our total asset number, Firecalc gives me 49%.

So - am I missing something? I'd appreciate your thoughts and questions.

Thanks.

 

[ERD50]

How do you simulate the 2.5% COLA for the annuity in FIRECALC? Is that a cap, or 2.5% every year? Expenses?

-ERD50

 

[jclarksnakes]

Those seem like pretty good numbers for an annuity. Firecalc is telling you that the annuity is the better deal but Firecalc is only as good as the numbers you put into it. Asset allocation can make a big difference in Firecalc results. Whether you input all of your expected SS or discount it like some people on this forum do can also make a big difference. I would guess based on the difference in the Firecalc generated percentage that your projected expenses in retirement are large enough that you "need" the 35k that the annuity would pay versus the smaller 4% draw from the 500K.

 

[robbridg]

Those annuity numbers seem pretty good to me.

It seems like you could both retire now with a mil invested and a 42K pension, age 60, especially with SS coming up soon. You must have a lot of expenses and/or in very conservative investments.

 

[pb4uski]

That SPIA (actually a pension option I think) almost seems too good to be true.

If you're both in good health and have good family longevity it sounds like a winner to me. Your annual inflation adjusted benefit is $35k a year vs $20k (4% or $500k).

Is the pension plan well funded? Is the employer/sponsor financially stable? Who stands behind the pension payments - the pension plan or do they buy a SPIA from an insurance company?

Other than credit risk around the continued receipt of the pension payments, it sounds good.

 

[ERD50]

That SPIA (actually a pension option I think) almost seems too good to be true. ....

Yes, it seems a bit odd to me after running the numbers. A 60 YO female has an average (this might be median, but probably close for this purpose) LE of 25 years:

https://personal.vanguard.com/us/insights/retirement/plan-for-a-long-retirement-tool

Drawing $35K from a $500K stash will deplete it in ~ 15 years if the insurer can just keep up with the 2.5% inflation, and ~ 19 years if it returns 3% above the 2.5%. And then there is the survivor benefit, which adds ~ 4 years to the 25 year LE on average.

I wonder if we are missing something? Or is it possible the Corp locked in some of these contracts in better times (unlikely, I think)?

-ERD50

 

[MikeTN]

I work for a non-profit which has TIAA-CREF for our basic retirement, a defined contribution plan. Most people allocate part of their annual contribution to TIAA's stable value fund. When we choose to retire the amount of income generated by a given sum of acculumation depends on the vintage. That is, contributions made 10 or more years ago when bond yields were high result in an annuity payout rate much higher than contributions made last year. the Corp in this instance may have done somehting similar. However, compared to our TIAA annuity payouts (which have no cola) it looks somehat better. I think this annuity would be hard to pass up, but if it were me I'd ask HR to explain how they can pay these rates.

 

[Chuckanut]

How do you simulate the 2.5% COLA for the annuity in FIRECALC? Is that a cap, or 2.5% every year? Expenses?

I have the same question. I know that some institutions have replaced a open cost of living adjustment with a constant lesser amount, around 2%. So knowing if it is a cap or a constant adjustment is necessary.

As far as simulating a capped COLA on FireCalc, what I did was split my [-]gold-plated platinum based[/-] polished brass on pine pension 50/50 - half COLA'd, half not COLA'd. I am open to better ideas.

 

[Katsmeow]

Is the SPIA purchased from an insurance company?

If so, what happens if the insurer goes broke? Is there any guarantee? In many states SPIAs have relatively low guarantees from state Guaranty funds?


I am curious about your Firecalc numbers showing only 49% chance of success with $1 million and SS and a $42k pension. You must have relatively high spending to result in such a failure rate.

 

[ERsoonihope]

Thanks for the great comments and questions. Way better input and ideas than I was expecting - this forum is great.

Here's responses to some, and my opinions on others. I really welcome you pointing out where my thinking is fuzzy.

A couple people who must be pretty darn smart about Firecalc mentioned that I must have relatively high spending, based on the numbers. TRUE!. And truth is, I have no idea how much we will really be spending. I've got pretty good records of current spending and I'm just plugging that into Firecalc (after adjusting out things like adding to investments, supporting our last child - who FINALLY got out of school and got employed at the end of last year). Add some in for taxes, and I'm plugging in $120K for annual expenses. I cannot imagine how we could possibly spend that much - but I've gone over the numbers a bunch, and honestly am just guessing whenever I try to nail it down any closer than that.

Regarding the COLA - it is a 2.5% fixed (not capped). The benefit goes up 2.5% every year, whether inflation is 0% or 10%. I wasn't sure how to handle that in Firecalc - so I just marked "inflation adjusted". Splitting it into two halves, and marking one cola, and one not is a good idea...although that ration seems a little conservative. Wouldn't that basically be assuming a long term inflation rate of 5%? (I should mention I'm by nature an optimist) I might go something like 2/3 cola, and 1/3 not and see how things look.

I'm not reducing the social security - just plugging in the #'s I get from them each year (see - proves I'm an optimist).

I'm assuming something like 75/25 equity and fixed income on the investments

Regarding the SPIA and risks associated with it. Her employer is a State government. The State is ranked one of the highest in terms of funding their retirement plans sufficiently. Latest "funded percentage on actuarial value of assets" is 95% (and I think that's the number that they typically say you should start worrying when it drops below 80%). The State "self annuitizes, which results in a higher annuity rates than are available through outside annuity providers. The rates are recommended by the Plan's (outside) actuary."

So nothing is for sure, but I believe the risk is fairly low on the annuity.

Anyway, that's my story. I'd welcome any further thoughts that this posting might bring up....and thanks everyone for your input. This is really helpful to me.

 

[pb4uski]

Then I would go for the pension rather than the lump sum.

 

[Ready]

If I could buy a $35K/year annuity with a guaranteed 2.5% COLA for $500K, and I was comfortable that the provider was financially stable, I would buy it without giving it a second thought. So I guess I'm agreeing with everyone else here, and also wishing I had that option for myself. Take it while it's still there!

 

[Gatordoc50]

Sounds like the State is giving you an incentive to purchase the SPIA. I would question why they were doing that before making a final decision.

 

[clifp]

Oh well it is a state pension plan that explains the really high payouts. State and local pension plan have this remarkable ability to make payouts higher than rare private pension and much higher than an SPIA from an insurance company.

My perception is that gap between public sector lump sum vs annuity has been grown since the financial crisis.

As other have said the only reason not to take the pension is if you didn't need the money, and you felt very strongly that you needed to live a $1 million to your kids.
Except for the bottom 4 or 5 states I think state pension plans are safe,and if yours is near the top, sleep well. $77K (COLA light),plus social security, and $500k. I for see no cat food in your future, well done.

Since you need the money, take the monthly pension and thank your union negotiators and your previous governors.

 

[Gatordoc50]

Oh well it is a state pension plan that explains the really high payouts. State and local pension plan have this remarkable ability to make payouts higher than rare private pension and much higher than an SPIA from an insurance company.

My perception is that gap between public sector lump sum vs annuity has been grown since the financial crisis.

As other have said the only reason not to take the pension is if you didn't need the money, and you felt very strongly that you needed to live a $1 million to your kids.
Except for the bottom 4 or 5 states I think state pension plans are safe,and if yours is near the top, sleep well. $77K (COLA light),plus social security, and $500k. I for see no cat food in your future, well done.

Since you need the money, take the monthly pension and thank your union negotiators and your previous governors.

I was thinking more along the line that they were offering great annuity payouts to avoid dispersing the lump sum. In other words, they don't have the money now but hope to later. Id take the lump sum. I might have to tighten my belt a little but at least I'm not picketing on the State Capital steps when I'm 70.

 

[ERD50]

Since you need the money, take the monthly pension and thank your union negotiators and your previous governors.

And fellow taxpayers?

I'm not trying to rain on any parade, just couldn't let that pass To the OP, that was the deal, enjoy your FIRE status!

-ERD50