Poll:At what discount rate would you buy SPIA?

[nun]

I'm with mikeyd above. I just don't want to hand someone a big wad of cash that took years of hard labor to produce with the the caveat that I was going to be alive many years down the road and that the new owners of my cash will be around too (and still making payments).

I'll take my own chances with large sums of money,

I can certainly appreciate your opinion, the last 30 years of DC retirement savings and efficient market investing dogma have made the idea of the annuity rather passe. It's interesting, then, to see people like Wade Pfau considering them in place of bonds and also that the UK is just now moving away from them as the default for retirement income. Sometimes the winds of change blow in different directions in different places.

 

[Gill]

Funny how we differ. I have been quite comfortable turning over a considerable wad of cash in the very high six figures to secure SPIA's approaching 10% for the rest of my life. It's insurance, not an investment, and if it turns out to be unprofitable because of my premature death, I'll have had the security of that income my entire life. I didn't commit over 25% of my portfolio to SPIA's and I now have less to worry about in managing the other 75%. To each his own.
Bruce

 

[nun]

Funny how we differ. I have been quite comfortable turning over a considerable wad of cash in the very high six figures to secure SPIA's approaching 10% for the rest of my life. It's insurance, not an investment, and if it turns out to be unprofitable because of my premature death, I'll have had the security of that income my entire life. I didn't commit over 25% of my portfolio to SPIA's and I now have less to worry about in managing the other 75%. To each his own.
Bruce

But how much insurance do you need? I suppose that depends on your income and toleration for risk. Is SS enough of a COLAed annuity for you? If you ER maybe a 5, 10 or 15 year SPIA is a good play to bridge the gap to when SS starts. But what proportion of your annual income should an annuity/pension/SS cover....25%, 50% or more? Going on the idea that you might only want to annuitize a max of 25% of your portfolio you'd get a quarter of your income from it and maybe when you get to SS age that might add another 25%, taking the pressure of the rest of your portfolio.

 

[Gill]

But how much insurance do you need? I suppose that depends on your income and toleration for risk. Is SS enough of a COLAed annuity for you? ...But what proportion of your annual income should an annuity/pension/SS cover....25%, 50% or more? Going on the idea that you might only want to annuitize a max of 25% of your portfolio you'd get a quarter of your income from it and maybe when you get to SS age that might add another 25%, taking the pressure of the rest of your portfolio.

Before purchasing SPIA's my pension and SS provided only about 1/3 of my required income. I put enough in SPIA's so that, when combined with my pension and SS, it gave me guaranteed income providing about 65% of my need. The remaining 35% comes from a 3% withdrawal from my net portfolio (assets less any debt). I feel I have plenty of inflation protection from SS and from the common stocks, TIPS and I-Bonds held in my portfolio. I sleep much better at night knowing I am not dependent on my portfolio to provide a large portion of my cash needs.
Bruce

 

[photoguy]

As an early retiree I think there's just too much risk buying an annuity that's not cola adjusted.

At this point, I don't even think it's worth it for me to do the calculations for determining an annuity price -- the way I see it, the offerer of the annuity is going to give you some return that's less then the expected from market investments + mortality credits - administrative costs. However at my age mortality credits are probably close to 0.

Given that I'm not a borderline case (volatility in equities won't sink me) I see no reason to go for an annuity.

 

[nun]

As an early retiree I think there's just too much risk buying an annuity that's not cola adjusted.

At this point, I don't even think it's worth it for me to do the calculations for determining an annuity price -- the way I see it, the offerer of the annuity is going to give you some return that's less then the expected from market investments + mortality credits - administrative costs. However at my age mortality credits are probably close to 0.

Given that I'm not a borderline case (volatility in equities won't sink me) I see no reason to go for an annuity.

When I ERed at 53, I did it without any annuity type income and was relying on taxable investments and 457b withdrawals to fund the time up to 59.5. So I moved enough money to cover 7 years of expenses into the stable value fund in my 457, I'm getting 2% on that money now which is slightly better than the rate you get on current 5 year annuities. I'm only considering buying into my state's pension because it has a COLA.

 

[mickeyd]

Not even if you got one with a 7% interest rate for an actuarial mortality and used it in place of other fixed income in your portfolio, al a Wade Pfau?

You are correct sir.

 

[nun]

You are correct sir.

I wonder what annuity buying says about a person's character. If you buy one are you an optimist because you think you'll live a long time, or a pessimist because you don't think you can invest the money to get better return?

 

[Huston55]

I wonder what annuity buying says about a person's character. If you buy one are you an optimist because you think you'll live a long time, or a pessimist because you don't think you can invest the money to get better return?

I think it speaks to risk tolerance versus character.


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[nun]

I think it speaks to risk tolerance versus character.


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It's not straight forward.....what about the person who buys an annuity with 25% of their money and puts the rest in equities.....are they less risk tolerant than someone with a 60/40 AA?

 

[Huston55]

It's not straight forward.....what about the person who buys an annuity with 25% of their money and puts the rest in equities.....are they less risk tolerant than someone with a 60/40 AA?

I agree it's not as straight forward as a single word; "character" or "risk." I was focusing more on the 'moral' side of the word "character" than the 'personality' side, just because that's what the term always makes me think of first. However, I don't think that's how you meant it.

Back to the "risk tolerance" question though, my sense is that many (most?) who use annuities do so to have a guaranteed income stream for essential expenses, which is putting a foot (both if they also cover discretionary expenses) in the "safety first" camp, as opposed to the "systematic withdrawal" camp. So, in that circumstance, I would say "yes" they are less risk tolerant in your example.

 

[nun]

Back to the "risk tolerance" question though, my sense is that many (most?) who use annuities do so to have a guaranteed income stream for essential expenses, which is putting a foot (both if they also cover discretionary expenses) in the "safety first" camp, as opposed to the "systematic withdrawal" camp. So, in that circumstance, I would say "yes" they are less risk tolerant in your example.

It's a bit semantic I suppose. I've had a 60/40 allocation in my first year of ER. I now plan to use 20% of my money to buy a pension/annuity and go 100% equities....apart from some bond exposure in psst Wellesley and 6 months of cash that I'll keep in the bank account for emergencies. Some how it feels a bit riskier even if I do have a lot of my income needs covered.

 

[haha]

I will never buy a nominal SPIA, regardless of its payout rate, because of its vulnerability to inflation.

That is the way I look at it too. It all depends on what you have seen in your lifetime, and how good your imagination is. If you lived through 1965 to 1982, and knew some older people on annuities (aka pensions) you will think long and hard about locking yourself into todays low interest rates. One poster made the point that if you are old enough, mortality advantage dominates interest rate. I am not interested, so I haven't tried to work that out in detail.

Ha

 

[nun]

That is the way I look at it too. It all depends on what you have seen in your lifetime, and how good your imagination is. If you lived through 1965 to 1982, and knew some older people on annuities (aka pensions) you will think long and hard about locking yourself into todays low interest rates. One poster made the point that if you are old enough, mortality advantage dominates interest rate. I am not interested, so I haven't tried to work that out in detail.

Ha

What if you had a COLA? Then you'd be protected from inflation and interest rate increases. Even if you bought the annuity with a 3.0% interest today, the rate on the annuity would essentially adjust with time...the declared COLA would be critical of course.

 

[haha]

What if you had a COLA? Then you'd be protected from inflation and interest rate increases. Even if you bought the annuity with a 3.0% interest today, the rate on the annuity would essentially adjust with time...the declared COLA would be critical of course.

Certainly, you are 100% correct. But I don't know if these are available on the open market. I think they are not, at the discount rate you quote.

Since I doubt such a thing can be bought, I have not analyzed whether I would want it, but at first glance it seems that it might be very attractive.

Ha

 

[Kimo]

I put 500,000 K in a 2.45 CD, I put 300K in a VG variable annuity (which is now worth 40K more than I started with a little over 2 years ago so this also helps somewhat with inflation and a guaranteed monthly withdrawal of 1200.00 per month which continues to go up each year. I put about 750.000 in Vanguard short and intermediate bond funds which generate which generate at least 2200 per month. I also have 700K in VG stock funds which generate anywhere between 10 and 25K (or more) per year in CG and a slight amount of interest and misc. payments.


So, with approximate 6000 + monthly income with no debt and money spread out all over I think a lot of the previous post are correct, I just decided a while back to more or less take everyone's idea and use most of them.


My point is I think just about all of you are right, I just decided to build my one pie chart basically using all the ideas mentioned here. I believe if you use most of the ideas here and figure out how much go's where it will work. This also allows me to wait as long as I want to apply for SS.


Of course I have the checking and emergency fund also.

 

[nun]

I put 300K in a VG variable annuity (which is now worth 40K more than I started with a little over 2 years ago so this also helps somewhat with inflation and a guaranteed monthly withdrawal of 1200.00 per month which continues to go up each year.

If we include variable annuities this will get really complicated. I'm not really a fan of those because of the fees and I like the guarantee of a fixed annuity as part of my fixed income, rather than the variability of a variable annuity as part of my equity assets.

 

[Kimo]

I only used it because it is the Wellington fund/clone and if I changed my mind I could cancel it with no fees at any time. As it turns out, it was a great move....but I do understand your thought process. I guess you could substitute my variable with the SPIA for example purchases, I just wrote what I really did....

 

[nun]

I only used it because it is the Wellington fund/clone and if I changed my mind I could cancel it with no fees at any time. As it turns out, it was a great move....but I do understand your thought process. I guess you could substitute my variable with the SPIA for example purchases, I just wrote what I really did....

Understood, I remember you describing that Vanguard VA before. My approach has been pretty "hap hazard". I bought a TIAA-Traditional annuity back in 1989 and it's averaged 6% interest up to now. I didn't really understand what I'd bought, but it's worked out ok. I'll probably just take the balance out over 10 years at some point. The other thing I did was to continue to pay into the UK's SS system after I moved to the US so I will get COLA'ed SS checks from both the US and the UK. I also have a small non-COLA pension from a megacorp. Now I've been offered a lump sum for that and I'll probably cash out. Strangely another ex-employer has offered to let me buy back into their pension plan and I'm going to do that because it has a COLA. So at 67 I'll end up with 3 COLA'ed income streams and I estimate the total will be $70k which is more than enough to cover my expenses and I'll go back into the accumulation phase.

 

[Kimo]

You sound quite secure, great plan. I also love the quote "when you have won the gams, why play?" I thought of that as I read your message and I feel the same way, that is why I have less in stocks than a regular plan or conventional thinking would suggest.

 

[nun]

You sound quite secure, great plan. I also love the quote "when you have won the gams, why play?" I thought of that as I read your message and I feel the same way, that is why I have less in stocks than a regular plan or conventional thinking would suggest.

I'll actually end up with more in stocks than many conventional plans. I'm using 20% of my assets to buy into the COLA'ed pension plan and almost all the rest will go into equities.....apart from the bond portion of Wellesley.....I might even go over to Wellington......Income from 55 to 67 will come from a rental property, the COLA'ed ex-employer pension, dividends, and IRA, 404b, 457 withdrawls etc.

 

[Kimo]

I'll actually end up with more in stocks than many conventional plans. I'm using 20% of my assets to buy into the COLA'ed pension plan and almost all the rest will go into equities.....apart from the bond portion of Wellesley.....I might even go over to Wellington......

Regardless, you sound very secure with your plan. I did use Wellington because of the 60/40 split and because this split is held in the annuities I was not worried about the stock portion as I have no reason to ever exit this product. I actually have a portion of my stock fund portfolio in Wellington. It allows me to compare the difference between the performance of the same fund with the annuity fees removed to the same fund without annuities. Either way, IMHO, you have done a great job!

 

[mickeyd]

I wonder what annuity buying says about a person's character. If you buy one are you an optimist because you think you'll live a long time, or a pessimist because you don't think you can invest the money to get better return?

To me it's just a matter of keeping it simple. My current financial situation provides me with enough money to last a lifetime so why introduce an element that will shave off part of my stash to an insurance company that provides me with less?

 

[nun]

To me it's just a matter of keeping it simple. My current financial situation provides me with enough money to last a lifetime so why introduce an element that will shave off part of my stash to an insurance company that provides me with less?

Well that's the question in the title of this thread, how good does the annuity have to be to make it worthwhile?

I just ran two versions of my retirement projections and its interesting to see that with 3% inflation and 7% return my calculations of networth with and without my state pension are equal at age 83.....just as I expected. If I use 4% return for the majority of my portfolio the crossing point is age 71 and after than I'm ahead using the state pension. But maybe the best part is if inflation picks up, then the COLAed pension really helps me maintain my net worth as I don't have to dip into my assets for income.

 

[nun]

So 4.8% based on an actuarial lifespan wasn't enough to for me to keep my small employer non-COLA'ed pension....I look the $35k lump sum and will roll it into my IRA. I still intend to buy into my other ex-employer plan that has a COLA.