SPIAs and Market Corrections.

[hnzw_rui]

I think you've got a math error here.

Suppose everybody retired at 60 and everybody died at 80. If the number of retirees per year is constant, then the "average age of retirees receiving pensions" is 70. But, clearly everybody gets 20 years of benefits before they "croak".

But, of course, mortality isn't that predictable. SPIAs are purchased by people who want to be prepared for the possibility of a very long life.

Ah, yes. I stand corrected. I guess my bias was skewed knowing a co-worker who died a week after retirement as well as plenty of folks who never even made it to retirement.

In that case, break-even based on SPIA amount (at 0% interest) is around 14 years for males and 15 years for females. Assuming the person collected 20 years of COLA pension, IRR is 4.65% for males and 4.19% for females. For fixed annuities, IRR after 20 years is just 1.91% for males and 1.45% for females.

 

[fritz]

Well, to be fair, that's hard to discern from the way the poll is worded. 99% of the people here might be planning to buy an SPIA and the poll results could be just as they are now, provided the people didn't make their decision to buy them based on the recent market blip.
I would consider buying one in the same circumstances you and others have mentioned-- an in extremis case where it looks likely my portfolio might not see us to the end of the line, and an SPIA looks like the best of a series of bad options.

Independent's "wonderful suggestions" could also be useful, for people in the right set of circumstances.

Maybe, but 93% (so far - one more said yes, they would) of those who voted said they would not buy annuities, and responses are also leaning that way. There are those that like them, sell them, and then there are those that see little to no value in them. I happen to be one of those who does see a little value in an SPIA, but I wouldn't buy one unless I was in fear of running out of retirement income (as you've also stated), and find no value in any of the other "wonderful suggestions" by independent.

 

[samclem]

Maybe, but 93% (so far - one more said yes, they would) of those who voted said they would not buy annuities, and responses are also leaning that way.

? No, the poll did not ask people if they intended to buy an annuity. It specifically asked (emphasis added) "Has the recent market correction made you consider adding fixed annuities to your AA?" That's an entirely different question. In fact, anyone who was already sure (before the market blip) they were going to annuitize their entire portfolio would have to answer "no".

 

[Independent]

Well, according to the poll results - you won't get too many takers here for your wonderful suggestions for other SPIA uses.

If you mean the poll in this thread, it's asking whether the recent market correction made you reconsider. I answered the poll "no". That doesn't say anything about whether I think annuities are useful, just whether this one additional data point changed my mind.

If you find my response, it's consistent with this recent post. I see annuities as a substitute for bonds, not for stocks.

I'm sure we can find other polls which show that most people here don't use private annuities. I don't -- in my case that's because deferring SS gives us all the annuities I think we'll need, with some possibility of an SPIA as a future Plan B. But most posters here can give you much more thoughtful responses than the video.

 

[Independent]

I happen to be one of those who does see a little value in an SPIA, but I wouldn't buy one unless I was in fear of running out of retirement income (as you've also stated), and find no value in any of the other "wonderful suggestions" by independent.

Let's be clear, I didn't use the phrase "wonderful suggestions", you did.

I think they are all good things to think about.

 

[fritz]

Maybe, but 93% (so far - one more said yes, they would) of those who voted said they would not add annuities, and responses are also leaning that way. There are those that like them, sell them, and then there are those that see little to no value in them. I happen to be one of those who does see a little value in an SPIA, but I wouldn't buy one unless I was in fear of running out of retirement income (as you've also stated), and find no value in any of the other "wonderful suggestions" by independent.

Ok - fixed it.

I did say "wonderful suggestions" but didn't add the quotation marks to draw it out.

 

[nun]

You love SPIA's, that's fine. But your conclusion doesn't seem to jive with your poll at all!

If I buy a SPIA it won't be until I am near 80 yo, and I certainly wouldn't buy one today (even if I was 80) if I could avoid it with interest rates/yields at historic lows. Very high price for floor income via SPIA's right now. YMMV

I don't love SPIAs, particularly in this low interest rate environment. But I do love having income that is not directly dependent on the stock an bond markets. SS, pensions, rental income and probably finally annuities will provide diversity of income. I have income enough from non direct market sources without having to resort to SPIAs, but believe that many retirees are not sufficiently diversified in their retirement income sources. People on this board can probably mange their withdrawals sensibly from their portfolios, however, is that true for the majority of retirees that have retirement accounts invested in mutual funds?

 

[Midpack]

I don't love SPIAs, particularly in this low interest rate environment. But I do love having income that is not directly dependent on the stock an bond markets. SS, pensions, rental income and probably finally annuities will provide diversity of income. I have income enough from non direct market sources without having to resort to SPIAs, but believe that many retirees are not sufficiently diversified in their retirement income sources.

And that's fine. However, those here who aren't at all interested in any type annuity haven't arrived at their decision unaware of their options or risks...

 

[nun]

And that's fine. However, those here who aren't at all interested in any type annuity haven't arrived at their decision unaware of their options or risks...

Sure, like I said I'm sure people here will manage their withdrawals sensibly. But I have always planned on retiring with a good floor of guaranteed income. Things worked out so that I actually don't need to make any withdrawals from my mutual funds for retirement income so I'm at the other end of the spectrum. There will probably be some people retiring with 401ks who will look at annuities again after the recent bit of turmoil mostly through fear. I think it's a good idea for them get income outside of the markets......unfortunately annuities aren't a good deal right now and many will compound market losses by buying poor annuities. My position on them is that I'd only buy a fixed annuity and then only with a reasonable interest rate. That is why I have some money in TIAA-Traditional which has some annuity type properties, but is yielding 4.5% interest and I can get at my principal and pass it on to my heirs. I use it as a stable value fund on steroids.

I remember I once posted a poll asking at what interest rate (not payout rate) people would buy an annuity.....of course that requires an assumption about your life span........and most people wouldn't even consider them with rates of as high as 8%, which seems silly to me if you are ing good health.

 

[Cobra9777]

As for Pensions vs. annuities - there's a simple answer to your question of why people are more accepting of pensions. Pensions are something you are "given" (not chosen), and annuities are something you buy (choose).

Not sure I agree with that. I "bought" my pension annuity when I elected to forego the lump sum. Additionally, pensions are not "given" like gifts. They are earned, same as other components of one's compensation and benefits package.

Aside from the currently-low payout ratios for SPIAs (which is no small consideration), I see little substantive difference in the decision process compared to a non-COLA DB pension annuity with a lump sum option. COLA'd pensions OTOH have a clear advantage and deserve the reverence that is bestowed upon them.

I answered 'no' to the poll, but that's because we have pensions (1 COLA, 1 not). Without pensions, I would *perhaps* consider an SPIA, but not at today's rates, and certainly not in response to the recent correction and ongoing volatility. It would be for the same reason we originally elected the pension annuities, which is to create a balanced mix of guaranteed income and portfolio withdrawals as a hedge against a bad sequence of returns in early (pre-SS) retirement. We annuitized just enough assets to cover bare-bones, non-discretionary expenses. The way I see it, any end-of-life upside potential that I sacrificed for my kids, is a relatively minor tradeoff compared to a potentially catastrophic result early on. Having said that however, samclem's suggestions seem quite reasonable as an alternative to an SPIA being considered for this reason:

An SPIA bought to protect against sequence of returns risk early in retirement will be very expensive due to the meager mortality credits for a younger person. If worried about the risk of poor stock market performance in the first years of retirement, I'd recommend that a retiree (especially an ER) start with a higher allocation to cash, a CD ladder, or a bond ladder to cover the first 5-10 years of expenses rather than use an SPIA for this purpose. They can then re-allocate to a higher % in equities gradually later once they are are out of the woods.

 

[robertf57]

Sure, like I said I'm sure people here will manage their withdrawals sensibly. But I have always planned on retiring with a good floor of guaranteed income. Things worked out so that I actually don't need to make any withdrawals from my mutual funds for retirement income so I'm at the other end of the spectrum. There will probably be some people retiring with 401ks who will look at annuities again after the recent bit of turmoil mostly through fear. I think it's a good idea for them get income outside of the markets......unfortunately annuities aren't a good deal right now and many will compound market losses by buying poor annuities. My position on them is that I'd only buy a fixed annuity and then only with a reasonable interest rate. That is why I have some money in TIAA-Traditional which has some annuity type properties, but is yielding 4.5% interest and I can get at my principal and pass it on to my heirs. I use it as a stable value fund on steroids.

I remember I once posted a poll asking at what interest rate (not payout rate) people would buy an annuity.....of course that requires an assumption about your life span........and most people wouldn't even consider them with rates of as high as 8%, which seems silly to me if you are ing good health.

One issue with this discussion is the "participating" character of TIAA-Traditional. It is not like going out and buying a SPIA where your payout is then fixed forever. As you know, the TIAA pays a guaranteed amount and then additional amounts that vary based on when you put the money in. These additional amounts reportedly have been paid consistently since the 30's.

The bottom line really is that few people can avail themselves of TIAA-Traditional. So it is not really meaningful to most on this forum.

 

[nun]

One issue with this discussion is the "participating" character of TIAA-Traditional. It is not like going out and buying a SPIA where your payout is then fixed forever. As you know, the TIAA pays a guaranteed amount and then additional amounts that vary based on when you put the money in. These additional amounts reportedly have been paid consistently since the 30's.

The bottom line really is that few people can avail themselves of TIAA-Traditional. So it is not really meaningful to most on this forum.

TIAA-Traditional is a sort of deferred fixed annuity. True, it is only available to those with retirement accounts with TIAA-CREF. But it does demonstrate that the details of an annuity are important....most are very bad, some are useful. After all these posts I realize that my main point isn't that people should buy SPIAs, but that they should diversify from direct investing in stock and bond mutual funds for retirement income. The unfortunate thing is that few people do that and when they do many use annuities.....and most of them suck.

 

[robertf57]

Understood Nun and I am quite happy with my Trad and TREA. They are a big piece of my "fixed income" asset allocation.

 

[pb4uski]

Unlikely that we'll ever buy a SPIA. Once SS and my pension are online they will cover ~60-65% of our expenses so our portfolio only has to cover the gap at a conservatively projected 3.6% WR but also with very conservative expenses that can be reduced if needed.

 

[mathjak107]

while i have no interest in an spia now it is a possible option down the road . my wife would much prefer at least the non discretionary stuff covered in a monthly check . she would rather much have the investments for discretionary spending , inflation adjusting and heirs .

 

[fritz]

Not sure I agree with that. I "bought" my pension annuity when I elected to forego the lump sum. Additionally, pensions are not "given" like gifts. They are earned, same as other components of one's compensation and benefits package.

Aside from the currently-low payout ratios for SPIAs (which is no small consideration), I see little substantive difference in the decision process compared to a non-COLA DB pension annuity with a lump sum option. COLA'd pensions OTOH have a clear advantage and deserve the reverence that is bestowed upon them.

I answered 'no' to the poll, but that's because we have pensions (1 COLA, 1 not). Without pensions, I would *perhaps* consider an SPIA, but not at today's rates, and certainly not in response to the recent correction and ongoing volatility. It would be for the same reason we originally elected the pension annuities, which is to create a balanced mix of guaranteed income and portfolio withdrawals as a hedge against a bad sequence of returns in early (pre-SS) retirement. We annuitized just enough assets to cover bare-bones, non-discretionary expenses. The way I see it, any end-of-life upside potential that I sacrificed for my kids, is a relatively minor tradeoff compared to a potentially catastrophic result early on. Having said that however, samclem's suggestions seem quite reasonable as an alternative to an SPIA being considered for this reason:

Very few companies still offer traditional DB pension plans anymore, more so in government positions. They either offer it (give it to you) or not - you cannot go to HR and tell them you want a DB pension plan. You could even choose to annuitize a 401K, but it's not a traditional company offered pension. As I understand it - pensions are offered by an employer (you cannot buy it), but you can buy an annuity.

You've always had to (earn) qualify for the DB pension plan. Used to be aro. 10 years to qualify for a DB pension. Back then, mine was actually non-contributory in a private company. It was a very disappointing payout when I qualified/left at the 10 year mark. A lot of people never stuck around that long (career moves, better pay, etc), or had the choice to stick around in some companies. The Federal Govt. had to step in and recommend guidelines for DB qualifications given the abuses that started to surface. Also started the end of DB pensions IMHO.

Employers also may or may not offer choices to the standard DB pension plan annuitized payout (ie. lump sum). If they do - then "you" can choose another option. My company did not originally offer lump sum. It was only after it was bought out the it was made available and I chose to take a lump sum payout option over the standard annuitized payout plan. Believe lump sum payout is possibly going the way of DB traditional pensions.

http://www.forbes.com/sites/ashleaebeling/2015/07/14/treasury-curtails-lump-sum-payouts/

 

[Gill]

I have purchased several SPIA's over the last five years and they certainly added to my comfort level watching the market drop last week.
Bruce

 

[Animorph]

Pension vs annuity: Normally with a pension a company is trying to lowball the lump sum, their cost. The annuity looks more attractive to us. Try to buy an SPIA with the lump sums being offered. With an SPIA the insurance company wants the highest purchase price it can get out of you. That makes the SPIA annuity less attractive to us. Two very different situations when considering lump sum versus annuity.