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fixed annuities -- issuer insolvency risk
Old 01-26-2018, 06:48 PM   #1
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fixed annuities -- issuer insolvency risk

I am considering buying a fixed annuity -- either deferred for several years, or waiting several years and then buying an immediate annuity. The reason I would do this is that I do not have a pension, and I think I would sleep better at night with some minimum annual income that is guaranteed. I would probably put only 10% or so of my total net worth into annuities.

I am not really asking whether you think this is a good idea or not. I realize there are different opinions about that. But I can figure that out for myself

My question is whether anyone has considered, in buying annuities, the risk of issuer insolvency/default. That risk is probably small -- but it is not zero.

There are state guaranty funds, but they tend to have relatively modest limits -- like a few hundred thousand dollars. (And if you move to a different state after you purchase the annuities, there is also the issue of which state's guaranty fund and applicable limit governs).

Has anyone, in an effort to address this risk, purchased a number of separate annuities from different issuers? For example, if you wanted $2mm in annuities, and the state guaranty limit was $300k, you could buy 7 separate annuities. I guess one could also ladder the annuities -- say, for example, buying one a year, and thereby diversify interest rates as well.

Any experience with, or thoughts about, this?

Thanks.
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Old 01-26-2018, 07:46 PM   #2
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I have not done this, but I have thought about it. I would not buy an amount over the state guarantee. Nothing wrong with laddering, and you can income streams trigger at different ages and at different (hopefully better) interest rates.
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Old 01-26-2018, 08:36 PM   #3
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When I looked into the state guarantee funds, it seemed as if the coverage was based on the state in which you live at the time that the regulator declares the insurer insolvent. So, even though your annuity might be sold by a company based in Pennsylvania, if you live in Florida, it would be Florida's limits that apply.

Buying annuities with values (and I'm not sure how they're valued) below your state's guarantee limits would seem to be a reasonable risk mitigation strategy.

But I am certainly no expert.
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Old 01-26-2018, 08:45 PM   #4
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Spreading it out seems like a reasonable approach, you'll also want to factor in the ratings (https://www.immediateannuities.com/i...mpany-ratings/) of the insurance companies you're considering buying from. It's been awhile since I priced fixed annuities but from what I recall the payout did vary quite a bit from one insurance company to the next for a given $ amount so you might take a little hit in the total payout by spreading it out but it's probably worth the extra safety benefit you'll get.
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Old 01-26-2018, 09:43 PM   #5
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Issuer insolvency is definitely worth guarding against. There are state guaranty funds, but they are a pretty weak backup so I would not plan on depending upon them.


I used to deal with insurer creditworthiness professionally. If I were putting a substantial amount of money into a SPIA or deferred annuity, I would adhere to the following rules:


- spread the money out to 3 or 4 insurers
- only buy from companies rated AA-/Aa3 or better
- whenever possible, buy from mutual insurers, the bigger the better
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Old 01-27-2018, 11:47 AM   #6
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I have about 67% convinced myself to buy a SPIA (or two) when the time comes; but the % of my portfolio I would spend is a fraction of my total -- 12% or so, or just enough so that the combined S.S./SPIA income equals about half what I need in monthly living expenses. That small shift in asset allocation away from the usual stocks/bonds/rebalance model means that my WR from that larger part of my portfolio is significantly smaller (3.6%-ish instead of 4%+). And, as I'm not retired yet, I'm going to wait and see what my real-life WR is. May not need the SPIA. I may get by on my musician skills.
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fixed annuities -- issuer insolvency risk
Old 01-27-2018, 02:20 PM   #7
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fixed annuities -- issuer insolvency risk

The question of ďreal life withdrawal rate,Ē or spending rate, is one that I find challenging to predict. I honestly have no idea what I will end up spending in retirement. And I think the amount that I am spending these days is not a good proxy, or even close to a good proxy, for what I will spend in retirement. I think Iím going to have to just live my life in retirement for a few years and see how it goes.

That seems a little inconsistent with the way most people around here seem to do things, with a lot of planning and modeling, but I just donít see it for me.
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Old 01-27-2018, 03:55 PM   #8
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While there is always some risk the issuer(s) failing, my aversion to annuities is inflation risk. We have some of the conditions (low unemployment, massive debt, etc) that preceded the Great Inflation that lasted over a decade. Just a few years of even high single-digit inflation could wreak havoc on a fixed annuity. I have a very modest non-cola pension (which I am grateful for). For me, that is enough interest "exposure" for our little nest egg.
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Old 01-27-2018, 05:10 PM   #9
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The inflation risk is real, and recency bias is dangerous. But I think I can deal with that risk by devoting only about ten percent of my investible assets to annuities and having some of the rest in equities and TIPS, both of which can be expected to offer a measure of inflation protection.
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Old 01-27-2018, 06:54 PM   #10
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I see SPIAs as of more value to someone whose retirement savings are in the "barely enough" category -- not for someone so wealthy that they could just live off the dividends. It is, after all, insurance against utterly running out of money. So, putting 10-15% into one while leaving the rest in stocks and bonds -- there's your inflation hedge.
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Old 01-27-2018, 07:43 PM   #11
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I have annuities from TIAA. TiAA has the highest possible rating from each of the three major rating services. I have been receiving annuity income from them for 8 years now, and I have no complaints.
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Old 01-27-2018, 07:49 PM   #12
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According to my Annuity sales guy, that is nothing to worry about.
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Old 01-27-2018, 07:53 PM   #13
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Wade Pfau has made the case that a portfolio of Single Premium Annuities (SPIA) and stocks is superior to a portfolio of bonds and stocks in many cases. See, his article, "A Broader Framework for Determining an Efficient Frontier for Retirement Income" in the Journal of Financial Planning. https://www.onefpa.org/journal/Pages...%20Income.aspx
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Old 01-27-2018, 09:02 PM   #14
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Originally Posted by MikeTN View Post
Wade Pfau has made the case that a portfolio of Single Premium Annuities (SPIA) and stocks is superior to a portfolio of bonds and stocks in many cases. See, his article, "A Broader Framework for Determining an Efficient Frontier for Retirement Income" in the Journal of Financial Planning. https://www.onefpa.org/journal/Pages...%20Income.aspx
In the spirit of full disclosure, please note that Wade Pfau is "Professor of Retirement Income" at The American College of Financial Services, which describes itself as: (my bold)

Quote:
Serving as a valued business partner to banks, brokerage firms, insurance companies and others since 1927, The American College of Financial Services has assembled a faculty of the foremost thought leaders in financial services to help advisors and their clients succeed.
https://www.theamericancollege.edu/about-the-college
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Old 01-27-2018, 11:34 PM   #15
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Originally Posted by medved View Post
I am considering buying a fixed annuity ..... I would probably put only 10% or so of my total net worth into annuities.

........ in an effort to address this risk, purchased a number of separate annuities from different issuers? For example, if you wanted $2mm in annuities, and the state guaranty limit was $300k, you could buy 7 separate annuities. I guess one could also ladder the annuities -- say, for example, buying one a year, and thereby diversify interest rates as well.

Any.... thoughts about, this?

Thanks.
Well if 10% is $2mm , then the total nut is $20mm.. very nice..

As for the spreading of risk by buying annuities from various companies, spread over a time line, I think it's an excellent idea if you are going to buy annuities.

Although personally I'd wait on annuities until past age 70 or in 8 years, whichever comes first.
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Old 01-28-2018, 05:02 PM   #16
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Someone with $20m should be able to live more than decently on dividends alone! > $500k from VWIAX, fer gawdssake.
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Old 01-28-2018, 06:04 PM   #17
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Is the annuity idea on the advice from your FA? I remember your earlier thread seeking allocation advice from a couple of years ago:
http://www.early-retirement.org/foru...ml#post1721036
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Old 01-28-2018, 09:37 PM   #18
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It is an idea I have discussed with the FA. I would not really say the FA is advocating a SPIA or deferred Income annuity, but more just trying to make sure I consider it and helping me think through the pluses and minuses. Some part of this is really more psychology than finance - I feel like I will sleep better knowing that I will have $X a year for the rest of my life and my wifeís life come hell or high water.
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Old 01-28-2018, 11:27 PM   #19
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Originally Posted by medved View Post
It is an idea I have discussed with the FA. I would not really say the FA is advocating a SPIA or deferred Income annuity, but more just trying to make sure I consider it and helping me think through the pluses and minuses. Some part of this is really more psychology than finance - I feel like I will sleep better knowing that I will have $X a year for the rest of my life and my wifeís life come hell or high water.
Well, you do realize that is an impossible standard, there are a number of possibilities that would cause all your annuities to stop paying. They are rare, or unlikely, but not impossible.
The obvious one is you and your wife are vacationing in Australia, and the country you bought all your annuities in becomes embroiled in a nuclear exchange wiping out all major cities.

Your checks stop, and the insurance companies and possibly the government is gone.
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Old 01-29-2018, 07:18 AM   #20
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Well, you do realize that is an impossible standard, there are a number of possibilities that would cause all your annuities to stop paying. They are rare, or unlikely, but not impossible.
The obvious one is you and your wife are vacationing in Australia, and the country you bought all your annuities in becomes embroiled in a nuclear exchange wiping out all major cities.

Your checks stop, and the insurance companies and possibly the government is gone.
Good point. That's the first thing I think about when considering an SPIA😨😨

And how do you think an alternative portfolio would have performed in that situation now that the US Government is gone...?
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