How Does the Level of Household Savings Affect Preference for Immediate Annuities?

[Big_Hitter]

"•People at the bottom of the savings distribution are very likely to run out of money in retirement and thus are inclined to select annuities.
•People at the top end of the savings distribution expect longer lifespans and can afford annuities even after leaving a financial legacy for their heirs.
•People in the middle generally face more uncertainty about their retirement adequacy and so they are more likely to hold on to their savings for precautionary purposes and perhaps also for some hope of leaving a financial legacy for their heirs."

https://www.ebri.org/publications/ib/index.cfm?fa=ibDisp&content_id=3415

 

[Dawg52]

The results also show clear preference for annuitizing smaller shares of assets or partial annuitization. When compared to their current financial situation, only 16.5 percent of retirees (ages 65 and above) preferred full annuitization compared to 43.0 percent who preferred a one-quarter annuitization.

If I ever do buy one I doubt I put more than 10% in one. But certainly not before the age of 70 based on today's rates.

 

[Freedom56]

Why would anyone want to buy annuities? Buy a basket of investment grade notes, preferred stock, or even REITs for income. At least you are not surrendering your principal over to an insurance company.

 

[Big_Hitter]

Why would anyone want to buy annuities? Buy a basket of investment grade notes, preferred stock, or even REITs for income. At least you are not surrendering your principal over to an insurance company.

so you don't outlive your assets?

 

[Gill]

Why would anyone want to buy annuities? Buy a basket of investment grade notes, preferred stock, or even REITs for income. At least you are not surrendering your principal over to an insurance company.

Not an unexpected response. Happens every time an SPIA is mentioned. The answer is one word - guarantee.
Gill

 

[gerntz]

What happens to the guarantee if the insurance company goes belly up?

 

[2017ish]

1. pick stronger companies at outset.
2. for the very conservative, stay within your state's IGA limits.
3. for an overview of how seldom insolvencies have impacted annuities (so far), see https://www.advisorperspectives.com/newsletters12/pdfs/How_Safe_are_Annuities.pdf For an objective view of the topic, here is Mike Piper on SPIAs, including how to guard against insolvency: Single Premium Immediate Annuity: Why They’re Useful and When to Buy Them — Oblivious Investor

 

[I was misinformed]

Why would anyone want to buy annuities? Buy a basket of investment grade notes, preferred stock, or even REITs for income. At least you are not surrendering your principal over to an insurance company.

From one perspective a SPIA provides an additional dimension of diversification - an investment whose total payout is tied to a trigger (your longevity) that is uncorrelated with the performance of all other markets.

Of course this is a somewhat limited perspective as:

(i) in reality most SPIA suffer from inflation risk correlated with bond markets
(ii) one could imagine extreme economic distress causing correlated events - markets crashing and the annuity company defaulting

 

[mathjak107]

the less discretionary income one has the more they need to avoid equity's .

with little or no flexibility to cut back if needed because everything is a need and not a want the more damage equity's can do to an already stressed situation making a bad situation worse . .

so it isn't the asset level you have that is as important as how much slack can be created in the spending if push came to shove .

that should determine equity's or some form of base income from an spia or longevity annuity which may be the best idea if you are in that situation .

we have a fair amount of assets and when planning our retirement lifestyle .

we could stay here in queens where we have lots of discretionary spending or move to manhattan where we would have little discretionary spending and little we could cut if we had to .

 

[mathjak107]

What happens to the guarantee if the insurance company goes belly up?

they are usually merged with a healthy company as well as states have different guarantee's .

so far you stand a better chance of failing and going belly up than an insurer .

even 2008 did not see any money lost in annuity or life insurance products .

while aig had issues their insurance business stayed rock solid and was never at risk .

 

[nun]

People buy annuities because they are uncertain of stock market returns. Insurance products promise guarantees. Having looked a some SPIAs and whole life insurance quotes recently the IRR on them for an average lifespan usually comes out around 4%. So is getting 4% for a long term investment plus some insurance going to be better than an equity/bond/cash portfolio? We can only make an informed guess at the answer.

I think that a partial annuitization to supplement SS is not a terrible thing to do if that floor of guaranteed income allows someone to sleep well at night and they then adjust their asset allocation in the rest of their portfolio. Also, if you aren't worried about a legacy and have enough to buy an annuity that will cover your needs (inflation is the issue here) then why not annuitize, you'll certainly get a thankful Christmas card from the insurance company every year.

 

[Closet_Gamer]

I always smile when the SPIA topic comes up...it sits right alongside the "should I pay off my mortgage?" question in terms of illiciting an immediate, hard division of opinions.

I'm too young to really be in this SPIA decision and in any event wouldn't do it with rates where they are...but I'm always left to wonder:

Why is it that someone who retires with a defined benefit pension (at the cost of reduced lifetime take home pay to save for retirement ) is "lucky to have guaranteed income" but someone who took home more money and then decides to create a "do-it-yourself" pension via a SPIA is a dullard?

I feel certain I'm about to be informed why I'm a dullard...football season is over and I've nothing to do today so fire away!

 

[aja8888]

I feel certain I'm about to be informed why I'm a dullard...football season is over and I've nothing to do today so fire away!

Baseball season is less than two months away and in the meantime, the NHL and NBA are there to amuse us.

 

[Gill]

I always smile when the SPIA topic comes up...it sits right alongside the "should I pay off my mortgage?" question in terms of illiciting an immediate, hard division of opinions.

I'm too young to really be in this SPIA decision and in any event wouldn't do it with rates where they are...but I'm always left to wonder:

Why is it that someone who retires with a defined benefit pension (at the cost of reduced lifetime take home pay to save for retirement ) is "lucky to have guaranteed income" but someone who took home more money and then decides to create a "do-it-yourself" pension via a SPIA is a dullard?

I feel certain I'm about to be informed why I'm a dullard...football season is over and I've nothing to do today so fire away!

Krotoole, you mirror my thinking exactly. I am well into my 70's and have purchased a dozen SPIA's since turning 70, two of them longevity annuities beginning at age 85. I've invested about 25% of my net worth in SPIA's and still maintain a sizeable seven-figure portfolio with annuity income now in the six figures. I'm thoroughly enjoying the greatly increased cash flow and the security of a sizeable guaranteed income. I have considerable inflation protection with TIPS, I-Bonds and equities as a well as a significant bond portfolio. I should mention, I spent my career in personal finance so I am not a novice in this area. Life is good.
Gill

 

[easysurfer]

I always smile when the SPIA topic comes up...it sits right alongside the "should I pay off my mortgage?" question in terms of illiciting an immediate, hard division of opinions.

I'm too young to really be in this SPIA decision and in any event wouldn't do it with rates where they are...but I'm always left to wonder:

Why is it that someone who retires with a defined benefit pension (at the cost of reduced lifetime take home pay to save for retirement ) is "lucky to have guaranteed income" but someone who took home more money and then decides to create a "do-it-yourself" pension via a SPIA is a dullard?

I feel certain I'm about to be informed why I'm a dullard...football season is over and I've nothing to do today so fire away!

I think most folks who think a person who decides to create a "do-it-yourself" pension via a SPIA is a "dullard" because they look at the SPIA through the lens of investment returns an not as insurance.

I'll even ad, since SPIA's have been described as the opposite of life insurance, why then is life insurance considered a must have by many? Taking a step back, usually the insured is paying regular premiums for a long long time before collecting. As an investment, life insurance may not be such a good think but it is insurance that offers peace of mind.

My thought is that with life insurance vs a SPIA, the life insurance feels like you are playing with house money. If you die early, the beneficiary could get a big payout. On the other hand, a SPIA feels like the insurance is playing with your money as you give a huge amount upfront with the risk of dying early.

 

[nun]

I always smile when the SPIA topic comes up...it sits right alongside the "should I pay off my mortgage?" question in terms of illiciting an immediate, hard division of opinions.

I'm too young to really be in this SPIA decision and in any event wouldn't do it with rates where they are...but I'm always left to wonder:

Why is it that someone who retires with a defined benefit pension (at the cost of reduced lifetime take home pay to save for retirement ) is "lucky to have guaranteed income" but someone who took home more money and then decides to create a "do-it-yourself" pension via a SPIA is a dullard?

I feel certain I'm about to be informed why I'm a dullard...football season is over and I've nothing to do today so fire away!

Where you put you money is dictated by many factors.....the largest is probably the level of return vs risk, but liquidity and insurance are also factors.

An SPIA with an IRR of 7% for an average lifespan would be hard to pass up, one that pays 3% does not excite me. In fact when I retired I used 18% of my defined contribution funds to buy into an employer's defined benefit pension plan because it started at age 55, had a COLA and the IRR implied by living to age 83 was 7.5%.


Thirty years ago I also bought a fixed deferred annuity not really knowing what I was doing. Luckily interest rates were 7% and 8% back then and today that annuity is paying 4.8% and I just include it in my fixed income allocation. I would not buy that deferred annuity now or a commercial SPIA at today's rates.

 

[Huston55]

Krotoole, you mirror my thinking exactly. I am well into my 70's and have purchased a dozen SPIA's since turning 70, two of them longevity annuities beginning at age 85. I've invested about 25% of my net worth in SPIA's and still maintain a sizeable seven-figure portfolio with annuity income now in the six figures. I'm thoroughly enjoying the greatly increased cash flow and the security of a sizeable guaranteed income. I have considerable inflation protection with TIPS, I-Bonds and equities as a well as a significant bond portfolio. I should mention, I spent my career in personal finance so I am not a novice in this area. Life is good.
Gill

The numbers in your post point to an original NW well into the mid-seven figures. I'm curious why someone with such a large NW would choose annuities versus a SWR/VWR strategy. Would appreciate you sharing your strategy and the logic that got you to this approach.

 

[imoldernu]

Am ignorant about annuities, except that we have a small one that was opened when DW's mom passed away in 1985.
It was for $8000, which inflation says would be about $18,000 today.
The current accumulated value is $63,000 and the surrender value is $53,000.

I don't know what kind of annuity it is, but when I called to ask how much it would provide in income, I was told that it had to be calculated over a 10 year payout. Since we won't make that, we just let it lie where it is. the minimum interest earned is 4%, though for the first 2 years, the interest rate was 12%.

The annuity has passed through four companies since it was opened, and now is with Metlife. Probably should have taken the surrender value a long time ago, but not worth the bother today, as we have no appetite for investing.

 

[nun]

Am ignorant about annuities, except that we have a small one that was opened when DW's mom passed away in 1985.
It was for $8000, which inflation says would be about $18,000 today.
The current accumulated value is $63,000 and the surrender value is $53,000.

I don't know what kind of annuity it is, but when I called to ask how much it would provide in income, I was told that it had to be calculated over a 10 year payout. Since we won't make that, we just let it lie where it is. the minimum interest earned is 4%, though for the first 2 years, the interest rate was 12%.

The annuity has passed through four companies since it was opened, and now is with Metlife. Probably should have taken the surrender value a long time ago, but not worth the bother today, as we have no appetite for investing.

Deferred annuities have a number of payout options. One is to buy a lifetime annuity that will pay an income as long as you live and another is a 10 year payout where you get 1/10th of the account balance every year for 10 years. TIAA-Traditional annuity also allows interest only payments and systematic withdrawals....I assume other deferred annuities do that same. If you don't convert the deferred annuity to a lifetime annuity then you can pass on the account balance when you die to your heirs.

The interest rates on fixed DAs bought in the 1980s were high. My TIAA annuity bought in 1987 started out crediting at 9% with a guaranteed minimum of 3%...today it's crediting at 4.8%. I had thought about doing a 10 year payout and putting it in the market as I don't need to minimize risk, but 4.8% isn't bad and I will probably do nothing with it and just leave it to my heirs.

 

[Gill]

The numbers in your post point to an original NW well into the mid-seven figures. I'm curious why someone with such a large NW would choose annuities versus a SWR/VWR strategy. Would appreciate you sharing your strategy and the logic that got you to this approach.

Your question caused me to reflect a bit on my appetite for financial security. I guess I've always been a bit insecure about money, and even more so in retirement. I'm now 78, in great health, and my mother lived to be 100. I also have no real need to leave a substantial inheritance.

Having worked for five financial firms, I was never vested in a pension plan until my last job. Accordingly, my pension is only about $20,000 and SS is about $26,000. After retiring I became a bit envious of a relative with six figures of guaranteed income. This prompted me to buy some SPIA 's and the more I increased my guaranteed income the more I liked it. I have now put about $1.1 million in SPIA's including $100k in a longevity annuity. As I mentioned, I still have a substantial portfolio and budget a SWR from this of about 3% a year giving me a total cash flow of about $230K which will increase to over $260K when the longevity annuity kicks in at age 85.

As you can see from my earlier posts, I spent my career in the personal trust business. I don't know if that influenced my thinking and I wouldn't necessarily feel it is for everyone. For me, I'm very happy, enjoying retirement and have no worries about money.

Thanks for asking..
Gill

 

[nun]

Having worked for five financial firms, I was never vested in a pension plan until my last job. Accordingly, my pension is only about $20,000 and SS is about $26,000. After retiring I became a bit envious of a relative with six figures of guaranteed income. This prompted me to buy some SPIA 's and the more I increased my guaranteed income the more I liked it. I have now put about $1.1 million in SPIA's including $100k in a longevity annuity. As I mentioned, I still have a substantial portfolio and budget a SWR from this of about 3% a year giving me a total cash flow of about $230K which will increase to over $260K when the longevity annuity kicks in at age 85.

So being a financial professional I assume you worked out the IRR for various lifespans..........I think it's interesting at what IRR people would choose a SPIA, pension etc over direct investing. For me it would be around 6% for an average lifespan. Today a 70 year old living to 83 will get an IRR of 1% from a single life SPIA....but living to 95 pushes the IRR up to 6%. Still with so much cash I wouldn't feel the need for the insurance value of the SPIA so it's not what I would do.

 

[Gill]

So being a financial professional I assume you worked out the IRR for various lifespans....

No, I didn't, because it is irrelevant for the often-discussed reason that I view it as insurance, not an investment.
Gill

 

[gretah]

Another reason to consider an annuity -

I plan to purchase a small annuity for each of my 3 heirs. I will also purchase a small whole (not universal) life insurance policy for each beneficiary.

Most of my estate will go to charity. I expect one of the three heirs to dispute my Will. My having provided each with an annuity, life insurance benefit, and some cash will help prove that I did not "forget" to provide for each of them.

So I am using annuities and life insurance mostly as a strategy.

 

[Huston55]

Your question caused me to reflect a bit on my appetite for financial security. I guess I've always been a bit insecure about money, and even more so in retirement. I'm now 78, in great health, and my mother lived to be 100. I also have no real need to leave a substantial inheritance.

Having worked for five financial firms, I was never vested in a pension plan until my last job. Accordingly, my pension is only about $20,000 and SS is about $26,000. After retiring I became a bit envious of a relative with six figures of guaranteed income. This prompted me to buy some SPIA 's and the more I increased my guaranteed income the more I liked it. I have now put about $1.1 million in SPIA's including $100k in a longevity annuity. As I mentioned, I still have a substantial portfolio and budget a SWR from this of about 3% a year giving me a total cash flow of about $230K which will increase to over $260K when the longevity annuity kicks in at age 85.

As you can see from my earlier posts, I spent my career in the personal trust business. I don't know if that influenced my thinking and I wouldn't necessarily feel it is for everyone. For me, I'm very happy, enjoying retirement and have no worries about money.

Thanks for asking..
Gill

Gill-

Thanks very much for your candor. I think it's this kind of discussion which makes E-R.org the great community that it is. Even though others, including me, might not take the same path, there's wisdom to be gained by understanding what you've done. Thx much.

 

[karen1972]

One other reason, because as a child trying to get their parents to put their money in the market is fruitless. They have been ripped off by every advisor they have ever done business with, thus getting at least 1/2 of their money into an annuity means I know they will have income period. Given the 10 year age gap between my parents with my father being older, it puts the odds of my mother living 20 years without my dad at pretty good odds and she was never involved in the investing side but has a tendency to be a hoarder/spender, so I don't want a situation like my aunts where her husband died and she got his and blew threw 1/2 of it within a few years buying her way through her depression. Locking in assets can be good for people who don't have self discipline.