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Old 01-19-2018, 11:15 AM   #81
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Does the SPIA provide true inflation protection? If not, then you won't really be getting 6.2% annually, will you? (disregarding the likely "minor" observation that the 6.2% annuity "return" includes "return of your own money", so it isn't comparable to a real investment return). Over the long term, inflation may be the number one risk to the financial future of many retirees, it could easily chop the real value of that fixed SPIA monthly check by 60% in 30 years. If this money is supposed to cover "must pay" expenses, that's a problem. Price out an annuity that actually increases with inflation and see how it looks. To the degree that it is much more expensive than an annuity with a "fixed" monthly payout, you can see that the insurance companies apparently believe that future inflation is a significant risk (i.e. they charge a lot to cover that risk)--and if they believe the risk is significant, maybe it is something important for retirees to consider, too. Bottom line: If a person is buying an annuity to cover "must pay" expenses for a decades-long period, then it doesn't make much sense to gamble with regards to future inflation. They are paying big money to avoid market risk, why would they ignore inflation risk?

Annuities are providing very poor value right now, from an historical perspective. The government has announced an all-out drive to raise interest rates, will result in higher returns for annuities >purchased after the rates go up<. It is a bad time to buy. If you wait, your lump sum that you hand over to the insurance company will almost surely provide a larger monthly check because 1) Interest rates will likely go up and 2) you'll be older, so your mortality credits will increase.

If you buy an annuity, be sure to shop around. Prices can vary a lot, and these are high-profit items for many "helpful" advisors.


Agreed. They have their place, and can be useful (your post does a very good job of pointing out some cases of that). I just don't like that the fees are high, the sales info is often misleading, and that many purchasers believe they have purchased something that is different from what they actually got ("income that I can count on for my entire life to meet my basic expenses").
All true, what you say, which is why I would only put a fraction of my portfolio into a standard SPIA (the ONLY type of annuity I'm interested in.) Re: the payout; indeed, the first fifteen years or so are mostly return of principal. So, tax is negligible during that period! Once that is paid, then the SPIA is paying out the "house's" money ... a SPIA is insurance, after all. No matter how you bungle management of your liquid portfolio (mutual funds, etc.), the money will keep rolling in. And, you can take a significantly smaller % from the rest; increasing to cover inflation as necessary.
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Old 01-19-2018, 11:16 AM   #82
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In my cursory searches over the past decade or so, I have never been able to find an annuity whose benefit increases with the inflation rate.

I don't mean an increase 1 or 2 or 3 percent a year. They won't cut it if actual inflation increases by more than that.

I mean an annual increase matching the inflation rate as defined by CPI or some other measure.

Is there such a beast available now? Please post details or a link if you know of one.

And no, Social Security doesn't count.
COLA adjusted annuities are really hard to find. As of a few years ago, some of the companies that Vanguard sold for offered them because I recall getting a quote and they may still offer them. You might try there.

If you are willing to settle for a fixed percentage increase in benefits, for example, an increase of 10% every 3 years, you could roll your own with a SPIA and a ladder of deferred annuities. So if your benefit was $1,000 a month on the SPIA, you would then buy a 3 year deferred annuity that pays $100/month, and a 6 year deferred annuity that pays $110/month, etc.

I guess if you really wanted an annual increase you could extent that concept to create a ladder of deferred annuities that would do the trick.
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Old 01-19-2018, 11:57 AM   #83
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All true, what you say, which is why I would only put a fraction of my portfolio into a standard SPIA (the ONLY type of annuity I'm interested in.) Re: the payout; indeed, the first fifteen years or so are mostly return of principal. So, tax is negligible during that period! Once that is paid, then the SPIA is paying out the "house's" money ... a SPIA is insurance, after all. No matter how you bungle management of your liquid portfolio (mutual funds, etc.), the money will keep rolling in. And, you can take a significantly smaller % from the rest; increasing to cover inflation as necessary.
I thought the tax was even every year based on some formula.
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Old 01-19-2018, 12:11 PM   #84
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I thought the tax was even every year based on some formula.
Hmm ... actually, I suppose it could be, depending. I saw a bar chart that showed mostly principal return until year 16 or something; but I suppose insurance companies could structure it any way they want (? I'm not sure about any regulatory compliance requirements.)
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Old 01-19-2018, 12:14 PM   #85
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Maybe off topic, Maybe not.

I see some of you saying that SPIA's 6.2% is different that Rate of Return due to the payback of principle. I get that. When comparing that against "the 4% rule", which also consumes the original investment in 30 years, how exactly isn't that a fair comparison? Excluding the COLA bit , and the 100% transfer or remaining to your beneficiary of course. I think those can be accommodated in a SPIA, albeit not at the 6.2% rate quoted earlier.

BTW, Immediateannuitites.com has the CPI option to check, but it appears to not be an on-line quote. You must fill out the form and someone will get back to you. I don't want solicitations.
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Old 01-19-2018, 12:25 PM   #86
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Maybe off topic, Maybe not.

I see some of you saying that SPIA's 6.2% is different that Rate of Return due to the payback of principle. I get that. When comparing that against "the 4% rule", which also consumes the original investment in 30 years, how exactly isn't that a fair comparison?.
Because the 4% return from the Trinity Study does not consume the original investment in 30 years in most instances.
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Old 01-19-2018, 01:16 PM   #87
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In my cursory searches over the past decade or so, I have never been able to find an annuity whose benefit increases with the inflation rate.

I don't mean an increase 1 or 2 or 3 percent a year. They won't cut it if actual inflation increases by more than that.

I mean an annual increase matching the inflation rate as defined by CPI or some other measure.

Is there such a beast available now? Please post details or a link if you know of one.

And no, Social Security doesn't count.
My limited look at annuities showed me that, given the same initial cost, the inflation adjusted annuities started out paying a much lower amount and it might take a decade or more to get to the same payment that a SPIA starts at. That did not seem like good inflation protection to me.
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Old 01-19-2018, 01:18 PM   #88
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Because the 4% return from the Trinity Study does not consume the original investment in 30 years in most instances.
I may have to go back and read that Trinity study, and its updates. My understanding was that it included both principle and gains. That there is a certainly probability (very high) with being able to sustain a certain withdrawal rate over 30 years period. With anything less than 100% being that you ran out of money in those instances. Isn't that true?
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Old 01-19-2018, 03:36 PM   #89
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I may have to go back and read that Trinity study, and its updates. My understanding was that it included both principle and gains. That there is a certainly probability (very high) with being able to sustain a certain withdrawal rate over 30 years period. With anything less than 100% being that you ran out of money in those instances. Isn't that true?
I should state that the study did not entirely reduce the portfolio to zero, except when it failed. It does allow drawing principle and gains as required, since it used a total return approach. I may have misinterpreted your original comment.
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Old 01-19-2018, 05:28 PM   #90
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On the other hand, I may just chuck it into the Vanguard Wellesley Income Fund.
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Old 01-19-2018, 05:59 PM   #91
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On the other hand, I may just chuck it into the Vanguard Wellesley Income Fund.
Although past history is not predictive of future results I think it's useful to look at the price history for a long period of time to see what happened during "stressful" periods in the past. Wellesley dropped a little over 25% to the bottom in early march 2009. It recovered quickly but it certainly wouldn't have helped any on March 1 2009 to panic and sell. https://finance.yahoo.com/quote/VWIN...&frequency=1mo
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Old 01-19-2018, 06:10 PM   #92
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Although past history is not predictive of future results I think it's useful to look at the price history for a long period of time to see what happened during "stressful" periods in the past. Wellesley dropped a little over 25% to the bottom in early march 2009. It recovered quickly but it certainly wouldn't have helped any on March 1 2009 to panic and sell. https://finance.yahoo.com/quote/VWIN...&frequency=1mo
A hobby of mine is charting other balanced funds on Morningstar, adding VWINX to the chart, and comparing the drop in '08-'09. VWINX almost inevitably beats them.
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Old 01-19-2018, 10:25 PM   #93
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A hobby of mine is charting other balanced funds on Morningstar, adding VWINX to the chart, and comparing the drop in '08-'09. VWINX almost inevitably beats them.
Yeah, tough to beat VWINX in their particular area. Some magic pixie dust there. I hope it continues because about 35% of my liquid NW is in Wellesley.
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Old 01-19-2018, 11:19 PM   #94
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Hmm ... actually, I suppose it could be, depending. I saw a bar chart that showed mostly principal return until year 16 or something; but I suppose insurance companies could structure it any way they want (? I'm not sure about any regulatory compliance requirements.)
I'm pretty sure the IRS has a set formula based on some assumed number of years and you do pay some small amount of tax each year on the SPIA income.
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Old 01-20-2018, 06:39 AM   #95
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I'm pretty sure the IRS has a set formula based on some assumed number of years and you do pay some small amount of tax each year on the SPIA income.
They use something called an exclusion ratio. This ratio equals the amount you paid for the annuity divided by the total expected payout. The latter just uses your IRS life expectancy.

So if you paid $100k for a SPIA and the predicted total payments over your life expectancy is $133k then the exclusion ratio would be 75%.

Then they exclude 75% of your monthy payment from taxation until you get back your initial investment. After that it's all taxable.


http://www.retirementhq.com/immediat...nt-tax-burden/
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Old 01-20-2018, 08:10 AM   #96
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On the other hand, I may just chuck it into the Vanguard Wellesley Income Fund.
That would be a whole lot smarter than buying an annuity in the current low-rate climate.
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Old 01-20-2018, 02:42 PM   #97
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That would be a whole lot smarter than buying an annuity in the current low-rate climate.
Unless we're looking at a decade like 1964-74 when a 50/50 portfolio gained about 1%/yr.
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Old 01-20-2018, 05:50 PM   #98
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That would be a whole lot smarter than buying an annuity in the current low-rate climate.
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Unless we're looking at a decade like 1964-74 when a 50/50 portfolio gained about 1%/yr.
Well, there's my dilemma in a nutshell!

At the moment, my idea is to supplement my S.S. with a SPIA that would be just enough to bring my "guaranteed" income up to 50% of the total needed. The other 50%, a 3-4% withdrawal from Wellesley, DODBX etc. I'd only be betting about 15% of my stash on SPIA.
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Old 01-20-2018, 06:00 PM   #99
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Well, there's my dilemma in a nutshell!

At the moment, my idea is to supplement my S.S. with a SPIA that would be just enough to bring my "guaranteed" income up to 50% of the total. The other 50%, a 3-4% withdrawal from Wellesley, DODBX etc.
I'm not understanding why it would/should be a dilemma. Early on you indicated that the SPIA was going to put you over the hump of what you needed and that you were very satisfied with the guaranteed 6.2% annual return/payout until you expire. The current interest rate environment shouldn't play any part - you have the 6.2% guarantee and that is what you said drew you to it.

If you have the guarantee that makes the numbers work, why even entertain the Vanguard fund which would expose you to market risk? It shouldn't matter what the Vanguard fund does - it's not going to guarantee you 6.2% annual return/payout until you pass away.
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Old 01-20-2018, 08:22 PM   #100
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I'm not understanding why it would/should be a dilemma. Early on you indicated that the SPIA was going to put you over the hump of what you needed and that you were very satisfied with the guaranteed 6.2% annual return/payout until you expire. The current interest rate environment shouldn't play any part - you have the 6.2% guarantee and that is what you said drew you to it.

If you have the guarantee that makes the numbers work, why even entertain the Vanguard fund which would expose you to market risk? It shouldn't matter what the Vanguard fund does - it's not going to guarantee you 6.2% annual return/payout until you pass away.
I already have a reasonable amount in Wellesley, DODBX, etc. I'll just shift a little cash over to some sort of SPIA; a diversification move for me, really. And I'm in no hurry to make the move -- it's possible interest rates (and SPIA payouts) may have moved upwards by later this year or early next.
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