Annuities

[ncbill]

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Originally Posted by capjak 1. You can buy a SPIA with inflation adjustment or with COLA from 1% to 5%. (both result in significant lower payments) 2. You can ladder purchases just like a CD to try to market time interest rates, and the SPIA returns more as you get older due to life expectancy and mortality credits. Just answering your issues, not recommending them.

Agree.

I wouldn't sign up for one unless I had to do so.

But there are plenty of non-salesperson FAs online who point out that some people have to just to meet their subsistence income needs.

[OldShooter]

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Originally Posted by ncbill Immediate annuities can work for those who have been forced to retire but don't have sufficient assets to meet their projected income needs.

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Originally Posted by ncbill ... But there are plenty of non-salesperson FAs online who point out that some people have to just to meet their subsistence income needs.

I don't see the logic in these statements. Insufficient assets are not magically transformed into sufficient assets by transferring them to an insurance company.

Best case, what would happen is that the annuitant would outlive the actuarial expectations of the insurance company, which is sort of a lottery win. But you can bet that any annuity contract and its fees will be designed to make this a very, very, rare occurrence.

[capjak]

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Originally Posted by OldShooter I don't see the logic in these statements. Insufficient assets are not magically transformed into sufficient assets by transferring them to an insurance company. Best case, what would happen is that the annuitant would outlive the actuarial expectations of the insurance company, which is sort of a lottery win. But you can bet that any annuity contract and its fees will be designed to make this a very, very, rare occurrence.

John Otar's (Red (not enough)/Grey(Maybe enough)/Green Zone (more than needed)) parapharased explanation:
I believe the explanation is that (based on at least 90% success) there is no magic that can ensure the failure rate is greater than 90% if you have insufficient funds at the start of retirement (based on historical returns) so the best a FA can do is secure (>90%) the highest income rather than risk running out of funds. In either case with or without an annuity the person would have to cut costs or get "Luck" in the market (which for some would be a roller coaster not worth taking).
Lifelong retirement income: the zone strategy | Advisor.ca

[pb4uski]

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Originally Posted by OldShooter .... But you can bet that any annuity contract and its fees will be designed to make this a very, very, rare occurrence.

Not really.... while it is true that annuity mortality assumptions differ from life insurance mortality assumptions that is due to risk of anti-selection... but people do outlive the annuity mortality. Mortality is quite predictable... in pricing the insurer builds in a spread that covers expenses, overhead and profit/return on required capital... IIRC it was about 200 bps back in the 1990s. In looking at differences between actual and expected profit, mortality variances are usually minor.

[OldShooter]

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Originally Posted by capjak John Otar's (Red (not enough)/Grey(Maybe enough)/Green Zone (more than needed)) parapharased explanation: I believe the explanation is that (based on at least 90% success) there is no magic that can ensure the failure rate is greater than 90% if you have insufficient funds at the start of retirement (based on historical returns) so the best a FA can do is secure (>90%) the highest income rather than risk running out of funds. In either case with or without an annuity the person would have to cut costs or get "Luck" in the market (which for some would be a roller coaster not worth taking). Lifelong retirement income: the zone strategy | Advisor.ca

Interesting article. The basic theme, though, is that if the retiree doesn't have enough money he/she will have to cut back on his/her spending, annuity or no annuity. We already knew that.

The numbers he uses in annuity cost examples are in the range of this board's old favorite, the 4% withdrawal rate. In some cases the annuity seems to provide even more. If I understood his first example, a $1M portfolio would buy an annuity that paid $50K -- 5%. I don't know how to reconcile that with a 4% number except to question it. If true, certainly buying such an annuity should be attractive to all of us -- a 25% raise with running-out-of-money risk eliminated at no cost The article is from 2012 so interest rate differences probably don't explain it.

I didn't study the charts and graphs. If I make my own model then I can prove anything I want. Also, making statements like " ... the probability of running out of money by age 95 is 16%, not very high but still beyond the established comfort level of 10% ..." implies impossible prediction accuracy. So I discount all of his predictive numerology. Looks like he makes a lot of money from it though.

But it was an interesting read. Thanks for the link.

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Originally Posted by pb4uski Not really.... while it is true that annuity mortality assumptions differ from life insurance mortality assumptions that is due to risk of anti-selection... but people do outlive the annuity mortality. Mortality is quite predictable... in pricing the insurer builds in a spread that covers expenses, overhead and profit/return on required capital... IIRC it was about 200 bps back in the 1990s. In looking at differences between actual and expected profit, mortality variances are usually minor.

Sounds like you were in the business. What percentage of annuitants live long enough to take the insuror's profit to zero? I'm still guessing not many.

[pb4uski]

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Originally Posted by OldShooter .....The numbers he uses in annuity cost examples are in the range of this board's old favorite, the 4% withdrawal rate. In some cases the annuity seems to provide even more. If I understood his first example, a $1M portfolio would buy an annuity that paid $50K -- 5%. I don't know how to reconcile that with a 4% number except to question it. If true, certainly buying such an annuity should be attractive to all of us -- a 25% raise with running-out-of-money risk eliminated at no cost The article is from 2012 so interest rate differences probably don't explain it. ....

I think the main difference is because the 4% rule is designed assuming that withdrawals increase for inflation and most SPIA's have fixed benefits. Another difference is that the 4% rule is typically based on underlying assets that are 40-60% equities and most insurers back annuity blocks with bonds rather than equities. 5% sounds a bit low... according to immediateannuities.com the payout rate for an immediate annuity (with refund) for a 65 yo male in NY would be 6.2% and 5.9% for a female.... not sure what age the 5% payout rate was for.

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Originally Posted by OldShooter .... Sounds like you were in the business. What percentage of annuitants live long enough to take the insuror's profit to zero? I'm still guessing not many.

I was.... with an insurer from the mid 1980s to the late 1990s... was Controller/CAO for the company and I was CFO for our annuities line of business for a few years during my tenure. At least for us, and I think for most insurers, the vast majority of annuities are in accumulation phase and very little (as a percentage of the total) is in payout phase.... since mortality is so predictable and mortality variances are so slight the last part isn't anything that we would have spent brain cells on... besides, typically the smallest subset that profitability would bessessed for would be a block or cohort of policies... never for individual policies.

[copyright1997reloaded]

Possibly naive question here. With an asset base that is not annualized, don' I have to plan for an expected lifespan that is well beyond the median and set my SWR based on that? For example, according to social security, a 65 year old male should live (on average) to 84.3 years of age. So, annuities (such as social security but also SPIA provider (subject to adverse selection issues) can plan for a median death of a age 65 annuity at 84.3 years while I, if trying to figure out a SWR, need to adjust it well beyond age 84.3.

So, absent profits (which are a huge consideration in reality), can't the SPIA offer a higher return vs a DIY approach?

[SpartacusSchmartacus]

Someone said it - best for people who do not know financials. Probably not good for the ones who signed up to this forum cuz they want to learn. I don't care for them but it sure worked out for OJ Simpson cuz the payments cannot be ever taken from him.

[OldShooter]

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Originally Posted by pb4uski I think the main difference is because the 4% rule is designed assuming that withdrawals increase for inflation and most SPIA's have fixed benefits. Another difference is that the 4% rule is typically based on underlying assets that are 40-60% equities and most insurers back annuity blocks with bonds rather than equities. 5% sounds a bit low... according to immediate annuities.com the payout rate for an immediate annuity (with refund) for a 65 yo male in NY would be 6.2% and 5.9% for a female.... not sure what age the 5% payout rate was for. ...

I was looking at the first example on page 1 of the article. The annuity was not fully COLA'd but the payout increased 3% a year. Annuitant was 65.

" ... Mark has only one feasible choice: buy a single premium immediate life annuity. This would pay him an annual income of $50,916 indexed at 3% for the rest of his life, calculated as $1,000,000 ÷ $19.64. ... "

So $50,916 is a payout of 5.09%. Re underlying assets I don't think the customer cares what the insurance company does with the cash. (Other than becming insolvent.) I guess the only other variable is life expectancy from age 65 but I wouldn't think Canada would be much different than US. So I dunno. Looks like a deal to jump on unless one is very pessimistic about inflation. (Not your dog, not your fight, I know. But those numbers plus his home-made model of the future make me suspicious of the whole article.)

[ncbill]

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Originally Posted by OldShooter I was looking at the first example on page 1 of the article. The annuity was not fully COLA'd but the payout increased 3% a year. Annuitant was 65. " ... Mark has only one feasible choice: buy a single premium immediate life annuity. This would pay him an annual income of $50,916 indexed at 3% for the rest of his life, calculated as $1,000,000 ÷ $19.64. ... " So $50,916 is a payout of 5.09%. Re underlying assets I don't think the customer cares what the insurance company does with the cash. (Other than becming insolvent.) I guess the only other variable is life expectancy from age 65 but I wouldn't think Canada would be much different than US. So I dunno. Looks like a deal to jump on unless one is very pessimistic about inflation. (Not your dog, not your fight, I know. But those numbers plus his home-made model of the future make me suspicious of the whole article.)

Again, some people have to do it.

An older relative I'm helping has just been diagnosed with stage IV cancer, 5-year survival rate ~20%.

They want to stay at home as long as possible, but have under $2,000/month in income from SS.

Annuitizing their remaining funds & choosing the "5 year certain" option roughly doubles their income over what is likely to be the time they have left.

It's something I'll be discussing with them...soon.

[capjak]

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Originally Posted by OldShooter I was looking at the first example on page 1 of the article. The annuity was not fully COLA'd but the payout increased 3% a year. Annuitant was 65. " ... Mark has only one feasible choice: buy a single premium immediate life annuity. This would pay him an annual income of $50,916 indexed at 3% for the rest of his life, calculated as $1,000,000 ÷ $19.64. ... "

A CPI annuity and 3% are very close in cost, I assume it is that the insurance company (Prudential) calculates longterm average inflation at a little bit higher than 3%. According to immediate annuity.com for a 65 yo male payout is 6.72% no COLA, 4.91% at 3% COLA, 4.82% CPI.

Remember 4% Withdrawal usually results in a legacy (sometimes a very large legacy) where an annuity does not.

[pb4uski]

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Originally Posted by ncbill Again, some people have to do it. An older relative I'm helping has just been diagnosed with stage IV cancer, 5-year survival rate ~20%. They want to stay at home as long as possible, but have under $2,000/month in income from SS. Annuitizing their remaining funds & choosing the "5 year certain" option roughly doubles their income over what is likely to be the time they have left. It's something I'll be discussing with them...soon.

The 5 year certain is just getting their money back with a little interest... probably about 2% or so.... they could do just as well or perhaps even better with a CD ladder or putting it in VMMXX and arranging an automatic monthly withdrawal equal to the annuity benefit.

[Red Badger]

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Originally Posted by capjak 1. You can buy a SPIA with inflation adjustment or with COLA from 1% to 5%. (both result in significant lower payments) 2. You can ladder purchases just like a CD to try to market time interest rates, and the SPIA returns more as you get older due to life expectancy and mortality credits. Just answering your issues, not recommending them.

I would not recommend them either. But a salesperson at the insurance company might. BTW a flawed answer is not much of an answer IMHO (#1 - a rider - very expensive; #2 - market timing). However YMMV!

[capjak]

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Originally Posted by Red Badger BTW a flawed answer is not much of an answer IMHO (#1 - a rider - very expensive; #2 - market timing). However YMMV!

#1 "significant Lower Payments" = Expensive
#2 Laddering CDs and SPIA is a fairly accepted practice when rates are low and are trending upwards



See my other post with the link for a more complete answer. I pride myself on being Flawless.

[pb4uski]

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Originally Posted by CRLLS ..... When faced with a similar decision, we chose to take the surrender value and annuitize a LI policy (different from cashing out and buying an annuity). ....

Do you mean that you chose to annuitize rather than take the surrender value and buy an annuity?

Once you take the surrender value, your ability to annuitize vanishes.... in other words, taking the surrender value and cashing out are the same thing.

[Chuckanut]

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Originally Posted by SpartacusSchmartacus Someone said it - best for people who do not know financials. .

[Putting Contrarian hat on]

Sometimes I fear think that people who have financial smarts are like gym rats. Nothing the 'ordinary' people do is good enough, one always has to try harder, go longer, suffer even more pain for a little more gain.

For many ordinary people things like 4% rules, financial calculators, asset allocation, sequence of return risk, etc. etc. etc. are more than they can handle. Like me at the gym (I just want to maintain a level of fitness that lets me live my life and hopefully keeps me healthy) they want to make sure they can pay the rent, put food on the table and take a vacation to Lake Runamuk every few years. Give them a CD ladder, no matter how financially sensible, at some point they will break a CD or two and spend the money on that fancy new car or lend it to a friend/relative who promises to pay it back within 12 months, etc. etc. etc.

I think we forget that most people in this forum are like the body builders at the gym - a small minority who actually enjoy what others consider to be a bother that should be minimized.

[Removing Contrarian hat]

I do admit that if a friend brings up an annuity purchase to me, even a SPIA, I often recommend they use CDs combined with some Wellesly which may give them more to spend in the long run, and let them keep more of their principle. Some agree with me, others want the security blanket an annuity provides.

Note: If you are a gym rat and a financially astute individual, please know that no offense is intended.

[ncbill]

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Originally Posted by pb4uski The 5 year certain is just getting their money back with a little interest... probably about 2% or so.... they could do just as well or perhaps even better with a CD ladder or putting it in VMMXX and arranging an automatic monthly withdrawal equal to the annuity benefit.

Yeah, after today's meeting with the eldercare lawyer we'll likely just be liquidating to cash & getting her house ready to sell.

[SpartacusSchmartacus]

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Originally Posted by Chuckanut Note: If you are a gym rat and a financially astute individual, please know that no offense is intended.

HA! none taken, that's funny (and true)!

But you do look better with the contrarian hat on ... just sayin

[38Chevy454]

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Originally Posted by Chuckanut ..... others want the security blanket an annuity provides.

But for most people that is a very expensive security blanket!


I am with the majority on here that feel competent to control my finances so an annuity is not needed. Plus being an engineer, I can do math and see where annuities are not a good solution for my financial investment strategy.

[ShokWaveRider]

How about MYGA's anyone have any of those. "Multi Year Guaranteed Annuity"