Should SPIAs be part of your AA?

[Richard4444]

I have SPIAs totaling ~ 10% of my NW. For me, that money would likely be in CDs or similar instruments returning (not earning) far less. It is forever and if I leave the planet early, I will not be upset. Also, due to not having children, I do not have to leave a substantial financial legacy.

Rich

 

[teej1985]

I have SPIAs totaling ~ 10% of my NW. For me, that money would likely be in CDs or similar instruments returning (not earning) far less. It is forever and if I leave the planet early, I will not be upset. Also, due to not having children, I do not have to leave a substantial financial legacy.

Rich

Vanguard used Hueler Income Solutions. I wonder if the pricing is the same. https://www.incomesolutions.com/

 

[Montecfo]

Did you mean to say "by [-]not[/-] deferring SS?"?

If so, then of course yes, if one defers and dies on the day before their 70th birthday then they took a chance and lost the bet because they forgo benefits that would have been worth $88k and bnever received a benefit payment.

I understood you to say you are taking your chances by not buying the SPIA.

Is your personal strategy on SS similar? I would think you would also take SS early and not make the implied purchase of a deferred annuity.

Stated differently, I would think you would not buy either annuity.

Since you have made that analogy, I wonder if your strategy is similar.

 

[pb4uski]

I understood you to say you are taking your chances by not buying the SPIA.

Is your personal strategy on SS similar? I would think you would also take SS early and not make the implied purchase of a deferred annuity.

Stated differently, I would think you would not buy either annuity.

Since you have made that analogy, I wonder if your strategy is similar.

I went back and looked and where I said I was taking my chances, I meant by not buyin a SPIA I was taking my chances that we might run out of money rather than putting the longevity risk onto an insurance company.

I view the purchase of a SPIA and delaying SS as a bit different actually, and arguably somewhat uncomparable since you can't buy a COLA-adjusted life annuity anywhere to my knowledge.

To buy the SS COLA adjusted annuity, I only need to make 8 years worth of monthly payments equal to my age 62 benefit.... in the example in post#16 above, the premium, with interest at the end of 8 years is $88k to get a 7.75% COLA-adjusted benefit (starting at $570/month).

Meanwhile, according to immediateannuities.com, $88,305 for a 70 yo male would pay $506/month ($469 for a female) and those benefits are fixed and the spending power of those fixed benefits will decay over time due to inflation.

Also, if I die the day after my 70th birthday... with the SPIA DW gets nothing (unless I wisely elect the life/10 year certain option)... with delaying SS DW gets the same enhanced benefit for as long as she live.

All together, delaying SS is a much better value proposition that a SPIA.... and one that I can't resist and have chosen to "purchase" since I'll soon be 65 and haven't started SS.

 

[finnski1]

I went back and looked and where I siad I was taking my chances, I meant by not buyin a SPIA I was taking my chances that we might run out of money rather than putting the longevity risk onto an insurance company.

I view the purchase of a SPIA and delaying SS as a bit different actually, and arguably somewhat uncomparable since you can't buy a COLA-adjusted life annuity anywhere to my knowledge.

To buy the SS COLA adjusted annuity, I only need to make 8 years worth of monthly payments equal to my age 62 benefit.... in the example in post#16 above, the premium, with interest at the end of 8 years is $88k to get a 7.75% COLA-adjusted benefit (starting at $570/month).

Meanwhile, according to immediateannuities.com, $88,305 for a 70 yo male would pay $506/month ($469 for a female) and those benefits are fixed and the spending power of those fixed benefits will decay over time due to inflation.

Also, if I die the day after my 70th birthday... with the SPIA DW gets nothing (unless I wisely elect the life/10 year certain option)... with delaying SS DW gets the same enhanced benefit for as long as she live.

All together, delaying SS is a much better value proposition that a SPIA.... and one that I can't resist and have chosen to "purchase" since I'll soon be 65 and haven't started SS.

It seems like a good trade off to wait to 70.
I did note that you said " the premium with interest is $88305 ...."
It looks like you used 5% as a return over those 8 years while waiting. So if the return was less than 5% it would look even better to wait to 70? and conversely if you got higher than 5% returns it would cost more to purchase the annuity but still seems a better deal to wait.
I think the trade off to wait still would be attractive to me because of the cola benefit with ss vs the declining purchase power due to inflation of the SPIA.
Although if I did my math right the breakeven to makeup the $570 monthly difference came out to 7.8% per year (no coincidence that that is what the benefit per year is by waiting)that the returns would have to be while waiting,

Even at that point you still lose out from there on because of the ss cola advantage over the SPIA

 

[pb4uski]

Yes. Also see post#16 of this thread. Ignoring COLA adjustments and time value of money the breakeven is about 82... or 12 years... but our life expectancy is to late 80s or more so it is a reasonable bet (of our heirs money).

 

[Montecfo]

I went back and looked and where I siad I was taking my chances, I meant by not buyin a SPIA I was taking my chances that we might run out of money rather than putting the longevity risk onto an insurance company.

That's how I understood it. Taking a chance, not buying the SPIA.

I view the purchase of a SPIA and delaying SS as a bit different actually, and arguably somewhat uncomparable since you can't buy a COLA-adjusted life annuity anywhere to my knowledge.

To buy the SS COLA adjusted annuity, I only need to make 8 years worth of monthly payments equal to my age 62 benefit.... in the example in post#16 above, the premium, with interest at the end of 8 years is $88k to get a 7.75% COLA-adjusted benefit (starting at $570/month).

Meanwhile, according to immediateannuities.com, $88,305 for a 70 yo male would pay $506/month ($469 for a female) and those benefits are fixed and the spending power of those fixed benefits will decay over time due to inflation.

Also, if I die the day after my 70th birthday... with the SPIA DW gets nothing (unless I wisely elect the life/10 year certain option)... with delaying SS DW gets the same enhanced benefit for as long as she live.

All together, delaying SS is a much better value proposition that a SPIA.... and one that I can't resist and have chosen to "purchase" since I'll soon be 65 and haven't started SS.

I think I could sun that by saying the difference is price. That is fair and makes sense. Thanks.

 

[pb4uski]

Yes, the difference is price/value. I'm a value shopper at the core. If I have a need and it is a good "deal" then I'm willing to part with the $$. If I have a need but it isn't a good deal then I'll wait until I really need it.

The SS delay is a good deal so I did it. Less excited about the SPIA.

 

[finnski1]

Yes. Also see post#16 of this thread. Ignoring COLA adjustments and time value of money the breakeven is about 82... or 12 years... but our life expectancy is to late 80s or more so it is a reasonable bet (of our heirs money).

Thanks.
DW AND i had no children so the whole legacy/heir thing won't factor into any decisions. I suppose that makes our process a little simpler.

I will be 62 next May whereas she will be 65 this November.
Right now our focus is on how to take her pension at 65 and making sure we do our due diligence on Medicare and medigap plans.
Also our FRA ss benefits our almost the same so the survivor concerns aren't really there either.

 

[Montecfo]

Pb4uski-

Thanks, that makes sense.

 

[Richard4444]

Vanguard used Hueler Income Solutions. I wonder if the pricing is the same. https://www.incomesolutions.com/

teej: I did buy my annuities via Vanguard as their commission was 1% less than immediateannuities.com, so I emailed them today and asked how they competed against immediateannuities. I didn't want to do the whole create a password thing, give all my info, to receive a quote.

Rich

 

[Red Badger]

Just my $.02. I received a buyout in 1992 that pays annually for 28 years (yup, about to run out of gas). Even with the modest inflation of the past 3 decades, the funds have approximately 50% of the buying power they originally did. While inflation is modest now, who knows down the road? To me, an SPIA has two risks. One, you die early and the house wins. Two, you live a long life and inflation erodes your SPIA to a pittance.

Annuities may be a good diversification for some, but I'll pass.

 

[Chuckanut]

Thanks.
DW AND i had no children so the whole legacy/heir thing won't factor into any decisions. I suppose that makes our process a little simpler.

If you don’t care about leaving a estate taking SS at 70 is a no brainer. Simply put, you will have more money to spend each year starting at 62 if you take SS at 70. Again this is for people who don’t care about leaving an estate.

https://www.early-retirement.org/forums/f28/laurence-kotlikoff-maximize-my-ss-com-77660.html#post1604411

Here is a pretty simple calculation for those that wish to spend more money in retirement and do not care about leaving an estate. For those that have a Big enough Portfolio and can afford to wait until 70 to take SS, you'll have more to spend every year of retirement.

Let's Say you retire this year at age 62 with the $1 Million Portfolio and decide to take a 4% SWR. You get Social Security of $19,476 per year at age 62 and delaying to age 70 would get you $34,092 per year. Let's assume no inflation for ease of calculations.

Scenario age 62. Your SWR is $40K per year and Social Security of $19,476 gets you a Spending total of $59,476 for each year of your retirement period.

Scenario age 70. You stash 8 years of $34,092 from your portfolio into a savings account for a total of $272,736. Your portfolio is now down to $727,264. Your 4% SWR is now $29,090 per year and you remove $34,092 from your savings account giving you a total of $63,182 to spend each year for the rest of your 30 year retirement period.

The Delay to age 70 gives you $3,706 more every year starting at age 62 with no more increased risk.

No need for any ... 'break even analysis'.

If your WR is more conservative, such as a majority of the people here and myself, the results are even more compelling. At a 3% WR plus SS at age 62 scenario is a total of $49,476 and the age 70 scenario is $55,910. The delay of SS to age 70 now increases your annual spending by $6,434.

 

[bmcgonig]

There's another way to look at it. Instead of the spia covering necessities, you could buy it to cover non essentials like travel etc. This will decrease as we age unfortunately so any inflation hit will likely be mitigated by our inability to enjoy those things due to age. Yes after 30 years your travel/eating out/fun budget is 50% less but at that age I'm definitely going to be limited in my ability to partake anyway if I'm even alive.


If you buy it as part of your bond allocation you'll get a 6-7% payout that also allows you to spend more early in retirement versus other fixed income returns. Yes I know, you're getting your own money back.

 

[pb4uski]

There's another way to look at it. Instead of the spia covering necessities, you could buy it to cover non essentials like travel etc. This will decrease as we age unfortunately so any inflation hit will likely be mitigated by our inability to enjoy those things due to age. Yes after 30 years your travel/eating out/fun budget is 50% less but at that age I'm definitely going to be limited in my ability to partake anyway if I'm even alive. ...

Interesting angle to think about the inflation decay. I think you could use the same logic even more broadly... as we age we spend less... travel less, less active in many cases, eat less, etc. I see it with my mom, aunts and uncles. People mention medical but in my observation absent a need for nursing home care medical is pretty constant... Medicare B/D oremiums and Medigap.

 

[finnski1]

If you don’t care about leaving a estate taking SS at 70 is a no brainer. Simply put, you will have more money to spend each year starting at 62 if you take SS at 70. Again this is for people who don’t care about leaving an estate.

https://www.early-retirement.org/forums/f28/laurence-kotlikoff-maximize-my-ss-com-77660.html#post1604411

Yes. Thank you I have seen that analysis (either on here or directly on his site) and it makes perfect sense to me.
I will be 62 next May and my wife will be 65 this November.

We have not touched her ss yet and will probably follow this course for one or both of us. Possibly take it at FRA for me since I am 3 and half years younger. It would put both of our benefits starting within 4 months of each other.
opensocialsecurity actually tells us to take hers at 70 and mine as early as a little under 63 but I am not sure I want mine that early.

 

[copyright1997reloaded]

Let's make it simpler and say what will S&P 500 dividends do. I think I can handle any 30 year period just fine. I can
control lot of things about ACA/Taxes by having some in 401k, some in Roth accounts, some in taxable accounts AND they keep
up with inflation.


https://www.multpl.com/s-p-500-dividend/table/by-year

Thanks for posting it, a great reference to have.

For those who think dividends "protect" a portfolio (in that you don't care about the portfolio value only that dividends continue to be paid), please note the time period 1930 to 1934. Dividends went from $15.61 to $8.61, a 45% drop. So if one were living off of dividends, that would hurt (a lot).

ETA: Just wanted to thank everyone on this thread - great food for thought and analysis. When I retired in 2009, I was offered an option in lieu of my defined benefit non-inflation adjusted pension. But, the big negative on the lump sum option is that I essentially lost my early retirement age subsidy that made the lump sum considerably less attractive than the pension. So I went for the pension, with the knowledge that inflation would be eating away at it. The good part of this (in 2009) was that I did a bare bones budget and figured that the pension alone was enough/almost enough to meet that budget. This provided me with a great amount of calming (remember this is early 2009 when the market was getting slaughtered) and that factor allowed me to remain long and strong in terms of my equity asset allocation (in fact, it allowed me to become more aggressive in 2009).

As others have mentioned, one of the POTENTIAL positives of SPIA's is risk pooling. The negative is that it isn't clear the buyer is the beneficiary of that risk pooling.

 

[brewer12345]

A positive aspect of spias is that they take the ability to blow yourself up due to poor decision making off the table. Watching the cognitive decline of some very sharp and accomplished people is making me think about this. I am not talking about dementia, just slow and steady erosion of decision making ability punctuated by health episodes. Current pricing and rates make the choice to buy a spia expensive, but I think you hedge more than longevity risk.

 

[TechLead]

Thanks for posting it, a great reference to have.

For those who think dividends "protect" a portfolio (in that you don't care about the portfolio value only that dividends continue to be paid), please note the time period 1930 to 1934. Dividends went from $15.61 to $8.61, a 45% drop. So if one were living off of dividends, that would hurt (a lot).

If you average out 1931-1940 dividends dipped on average to 12 USD 24% down. So it is not all that bad. Most people in that time period suffered more significant loss of income.

1931, 1932, 1933 had deflations off -9, -9.9, -5.1 which would very positively impact bond holdings. One would get coupon payments in stronger dollars. (I have no data on how many bonds due to market crash were worthless though)

 

[PatrickA5]

A positive aspect of spias is that they take the ability to blow yourself up due to poor decision making off the table. Watching the cognitive decline of some very sharp and accomplished people is making me think about this. I am not talking about dementia, just slow and steady erosion of decision making ability punctuated by health episodes. Current pricing and rates make the choice to buy a spia expensive, but I think you hedge more than longevity risk.

+1

There is some risk for individuals if most of their income is portfolio income. I read of people losing their life savings to scams and just poor financial decisions.

I doubt I'll get a SPIA, but it's possible. I like the idea of having an additional source of monthly income for as long as I live. I hate the idea of giving up my money to get one. Ha! If I did buy one, it would be for the life of both of us. I will probably consider one when I'm closer to 70.

 

[pb4uski]

.. opensocialsecurity actually tells us to take hers at 70 and mine as early as a little under 63 but I am not sure I want mine that early.

While opensocialsecurity.com my favorite SS claiming strategy site, one thing that it doesn't consider is the possibility or value of doing low-tax cost Roth conversions before starting SS.... that is part of why we are delaying.

 

[REWahoo]

I hate the idea of giving up my money to get one. Ha! If I did buy one, it would be for the life of both of us. I will probably consider one when I'm closer to 70.

My personal experience indicates reaching your 70's does nothing to lessen your aversion to giving up your money to buy a spia.

 

[PatrickA5]

My personal experience indicates reaching your 70's does nothing to lessen your aversion to giving up your money to buy a spia.

You're probably right. I need to figure out a way to use someone else's money to buy me a spia.

 

[REWahoo]

You're probably right. I need to figure out a way to use someone else's money to buy me a spia.

Yep, that's the optimal solution.

 

[bmcgonig]

Interesting angle to think about the inflation decay. I think you could use the same logic even more broadly... as we age we spend less... travel less, less active in many cases, eat less, etc. I see it with my mom, aunts and uncles. People mention medical but in my observation absent a need for nursing home care medical is pretty constant... Medicare B/D oremiums and Medigap.

10 years ago I could have a 16oz steak, a half bottle of wine and a dessert for a 9pm dinner. Now I can barely eat half that at 6pm otherwise I'll get a lousy night's sleep.

I agree about medical as well. Unless you need a nursing home or assisted living your medical bills will rise insignificantly.