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Should SPIAs be part of your AA?
Old 07-18-2020, 05:58 AM   #1
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Should SPIAs be part of your AA?

I recently heard a Wade Pfau interview discussion that focused on how/when to consider using SPIAs as another investment in your RE planning. I have to admit, my knee jerk reaction to the word "annuity" is negative. That said, I sense that Pfau is really a big proponent of their use. Putting legacy desires aside, one of the arguments is looking at our assets once we RE as how they create the most dependable income for life. I am hearing more people warming up to the idea of buying a SPIA to cover their base expense needs, but also some funding their wants/wishes budget with a SPIA. Assuming you are well funded, one argument is to fund your whole budget with a SPIA and then have everything else in stocks. While I have a hard time making peace with the fact that once i write the check my $$ are gone/locked into the SPIA for life, I can see somewhat of an argument here if the focus is on solely maximizing your cash flow needs in RE. So, should SPIAs be considered as at least part of your/in lieu of your bond allocation??
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Old 07-18-2020, 06:19 AM   #2
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I dunno. You can get a good idea of the interest rates the insurer is using by calculating the IRR for period certain annuities. I got on immediateannuities.com and priced $100,000 for a 65 yo male in FL and got the below.

The 10 year is yielding 1.47% and the 5 year is yielding 0.67%.

You can somewhat mitigate the $$$ gone risk by buying a life contingent with 10 years certain... that assures that your IRR will not be any less than MINUS 9.3%. Returns don't get attractive unless you live beyond your mid 80s.

I will take my chances. If I did buy a SPIA for our gap between spending and SS and invested the rest in equities we would end up with a 66/34 AA.

How lucky do you feel?
Lump Sum  100,000
Monthly benefit  494
Payout rate 5.93%
   
AgenIRR
650 
661-98.3%
672-80.7%
683-60.3%
694-44.8%
705-33.7%
716-25.7%
727-19.8%
738-15.3%
749-11.9%
7510-9.2%
7611-7.0%
7712-5.2%
7813-3.8%
7914-2.5%
8015-1.5%
8116-0.6%
82170.1%
83180.7%
84191.3%
85201.8%
86212.2%
87222.6%
88232.9%
89243.2%
90253.4%
91263.7%
92273.9%
93284.1%
94294.2%
95304.4%
96314.5%
97324.6%
98334.7%
99344.8%
100354.9%
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Old 07-18-2020, 06:34 AM   #3
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Quote:
Originally Posted by pb4uski View Post
I dunno. You can get a good idea of the interest rates the insurer is using by calculating the IRR for period certain annuities. I got on immediateannuities.com and priced $100,000 for a 65 yo male in FL and got the below.

The 10 year is yielding 1.47% and the 5 year is yielding 0.67%.

You can somewhat mitigate the $$$ gone risk by buying a life contingent with 10 years certain... that assures that your IRR will not be any less than MINUS 9.3%. Returns don't get attractive unless you live beyond your mid 80s.

I will take my chances. If I did buy a SPIA for our gap between spending and SS and invested the rest in equities we would end up with a 66/34 AA.

How lucky do you feel?
Lump Sum  100,000
Monthly benefit  494
Payout rate 5.93%
   
AgenIRR
650 
661-98.3%
672-80.7%
683-60.3%
694-44.8%
705-33.7%
716-25.7%
727-19.8%
738-15.3%
749-11.9%
7510-9.2%
7611-7.0%
7712-5.2%
7813-3.8%
7914-2.5%
8015-1.5%
8116-0.6%
82170.1%
83180.7%
84191.3%
85201.8%
86212.2%
87222.6%
88232.9%
89243.2%
90253.4%
91263.7%
92273.9%
93284.1%
94294.2%
95304.4%
96314.5%
97324.6%
98334.7%
99344.8%
100354.9%
See, you are looking at it the way I am... but should we?? IF it's all about maximizing RE income, should we care if we croak in 5 yrs or 40 yrs?? You are sort of making my point. It's hard to give up the "I want to grow my assets" mind set and give up the control... or just the thought that I just wrote a check for $1M and its gone!

In one respect, I can see (on paper) an attractive plan where you have funded somewhere between your base needs all the way to your needs/wants/wishes needs in SPIAs and the balance in stocks. I just don't know anyone doing it, and as a control freak, I think I would struggle with seeing my NW drop after writing a big check!
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Old 07-18-2020, 06:43 AM   #4
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While I have a hard time making peace with the fact that once i write the check my $$ are gone/locked into the SPIA for life, I can see somewhat of an argument here if the focus is on solely maximizing your cash flow needs in RE. So, should SPIAs be considered as at least part of your/in lieu of your bond allocation??
Let me cast it in an alternate light which we are all familiar with.

Let's suppose you have a pension coming from your employer. You have to make a decision whether to take a lump sum today or monthly payment for the rest of your life. Which do you choose?

It's exactly the same thing.
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Old 07-18-2020, 06:50 AM   #5
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Let me cast it in an alternate light which we are all familiar with.

Let's suppose you have a pension coming from your employer. You have to make a decision whether to take a lump sum today or monthly payment for the rest of your life. Which do you choose?

It's exactly the same thing.
Agreed. Only difference is you are making a decision to write a big check vs getting a big check. Im just wondering how many of us are really writing the big check from those $$ you invested all those years to see it leave your account, despite the fact it is producing monthly $$.
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Old 07-18-2020, 07:00 AM   #6
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Endless debate. I am very glad to see SPIAs singled out since there is a tendency lump all annuities together. The variable index variety annuity has tainted the whole industry. SPIAs and MYGAs in particular have some value for specific situations and I might consider either of these. My issue with SPIAs at the current time is locking in all time low rates. I seriously considered taking a lump sum pension and waiting until rates rose to buy a SPIA but Megacorp subsidized the survivor benefit so that made the decision easy for me. Bottom line it's an individual choice based on your comfort with risk vs. guaranteed income.
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Old 07-18-2020, 07:01 AM   #7
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It could be a good investment if you know inflation rate/Tax rates/ACA for a remainder of your life.
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Old 07-18-2020, 07:26 AM   #8
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It could be a good investment if you know inflation rate/Tax rates/ACA for a remainder of your life.
And what the stock market will be doing for the next 30 years!!

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Old 07-18-2020, 07:32 AM   #9
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I don't think stocks is a valid comparison.... totally different risk profiles.... even insurers who issue these products don't buy stocks to fund them.
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Old 07-18-2020, 07:32 AM   #10
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Originally Posted by VanWinkle View Post
And what the stock market will be doing for the next 30 years!!

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
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Old 07-18-2020, 07:57 AM   #11
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I don't think stocks is a valid comparison.... totally different risk profiles.... even insurers who issue these products don't buy stocks to fund them.
Insurers can buy real garbage.

Do you remember AIG bailout? AIG sells ton of annuities. I think government backs annuities up to some limit (100k-300k)
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Old 07-18-2020, 08:21 AM   #12
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Originally Posted by pb4uski View Post
I don't think stocks is a valid comparison.... totally different risk profiles.... even insurers who issue these products don't buy stocks to fund them.
I didn't make my point, the choice is between an annuity, or taking on some risk yourself which could include the stock market. I agree that a SPIA does not take stock market risk, but the decision on whether to buy a SPIA may make the potential buyer wonder about the stock market return over the same period in his conservative 30/70 portfolio.
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Old 07-18-2020, 08:35 AM   #13
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It is an interesting discussion. Contrast the sometimes negative view of SPIA with the oft-repeated advice to defer social security to FRA or beyond. Your IRR there could be minus 100%.

The adage that one should not feel bad that after you bought insurance your house didn't burn down comes to mind.

Stated differently, if an annuity was key to making my retirement work, I would consider one.
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Old 07-18-2020, 08:48 AM   #14
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Insurers can buy real garbage.

Do you remember AIG bailout? AIG sells ton of annuities. I think government backs annuities up to some limit (100k-300k)
You are incredibly misinformed. The AIG bailout had nothing with them selling annuities, or for that matter it had absolutely nothing to do with AIG's insurance companies. It was a bunch of yahoos who thought they were the smartest guys in the room selling credit default swaps up at the corporate level.

In fact, AIG's insurance companies ended up being their salvation as the bailout allowed AIG time to do an orderly selling of many of their non-US insurance companies and they used the proceeds from thoe sales to pay off the loans that the US goverment made to them.

I guess that it proves that you don't know what you don't know.
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Old 07-18-2020, 08:50 AM   #15
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Originally Posted by DawgMan View Post
... I am hearing more people warming up to the idea of buying a SPIA to cover their base expense needs ...
I think those people are guilty of very naive thinking. Suppose those needs are $50K/year, so they buy a $50K annuity. In 20 years at 2.5% inflation, that annuity will have $30K of purchasing power. The long term US inflation rate is 3.11% and the 40 year trailing average is in the neighborhood of 4%, so it's hard for me to see that 2.5% is a pessimistic number.

The only way an annuity can be expected to cover base expenses going forward is if it is indexed.

@pb4, great chart in post #2. How about adding a column or a couple of columns (2% and 3% inflation or your choice) that shows the purchasing power of that $494 as the annuitant ages?
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Old 07-18-2020, 09:01 AM   #16
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It is an interesting discussion. Contrast the sometimes negative view of SPIA with the oft-repeated advice to defer social security to FRA or beyond. Your IRR there could be minus 100%.

The adage that one should not feel bad that after you bought insurance your house didn't burn down comes to mind.

Stated differently, if an annuity was key to making my retirement work, I would consider one.
To me, deferring SS is nothing more than making a decision to buy a COLA adjusted life annuity... the benefits that I forgo are the installment "premiums" that I pay, and the increase in benefits vs taking earlier is the benefit.

With both deferring SS and a SPIA, if you die right after you pay the premium your IRR can be -100%.

For contrast, below the same analysis as in Post#2 but for deferring SS from 62 to 70 for someone whose FRA is 66. The premium is the future value of the $750/month that would be received at 62 for 8 years. The monthly benefit is the excess of the $1,320 that would be received if claiming at age 70 over the $750 if claiming at age 60. Also, note that because SS benefits increase with inflation, the returns are effectively real returns rather than nominal returns.

"Premium"  88,305
Monthly benefit  570
Payout rate 7.75%
   
AgenIRR
700 
711-97.7%
722-77.0%
733-55.0%
744-39.1%
755-28.1%
766-20.3%
777-14.7%
788-10.5%
799-7.2%
8010-4.8%
8111-2.8%
8212-1.2%
83130.1%
84141.2%
85152.1%
86162.8%
87173.4%
88184.0%
89194.4%
90204.8%
91215.2%
92225.5%
93235.8%
94246.0%
95256.2%
96266.4%
97276.5%
98286.7%
99296.8%
100306.9%
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Old 07-18-2020, 09:05 AM   #17
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.... @pb4, great chart in post #2. How about adding a column or a couple of columns (2% and 3% inflation or your choice) that shows the purchasing power of that $494 as the annuitant ages?
Your wish... ah, strike that.

Lump Sum  100,000   
Monthly benefit  494   
Payout rate 5.93%  
   Spending power @ 
AgenIRR2% inflation3% inflation
650   
661-98.3%100.0100.0
672-80.7%98.097.0
683-60.3%96.094.1
694-44.8%94.191.3
705-33.7%92.288.5
716-25.7%90.485.9
727-19.8%88.683.3
738-15.3%86.880.8
749-11.9%85.178.4
7510-9.2%83.476.0
7611-7.0%81.773.7
7712-5.2%80.171.5
7813-3.8%78.569.4
7914-2.5%76.967.3
8015-1.5%75.465.3
8116-0.6%73.963.3
82170.1%72.461.4
83180.7%70.959.6
84191.3%69.557.8
85201.8%68.156.1
86212.2%66.854.4
87222.6%65.452.7
88232.9%64.151.2
89243.2%62.849.6
90253.4%61.648.1
91263.7%60.346.7
92273.9%59.145.3
93284.1%58.043.9
94294.2%56.842.6
95304.4%55.741.3
96314.5%54.540.1
97324.6%53.538.9
98334.7%52.437.7
99344.8%51.336.6
100354.9%50.335.5
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Old 07-18-2020, 09:13 AM   #18
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That's what Jim Otar's book Unveiling the Retirement Myth was about, specifically the Zone Strategy - who should annuitize, who doesn't need to, and the gray area in between. otar retirement calculator

Quote:
Jim Otar [page 440] wrote:
1. If your withdrawal rate (WR) is lower than the sustainable withdrawal rate (SWR), then you are in the green zone. You have abundant savings. No annuitization necessary.
2. If your withdrawal rate is greater than the annuity rate (AR), then you are in the red zone. You have insufficient savings. Full annuitization may not be enough to meet your projected spending.
3. If your withdrawal rate is between SWR and AR, then you are in the gray zone. You have sufficient savings. Some annuitization may be wise.
Of course the threshold WR numbers are subject to some debate, there are no guarantees.

http://docshare04.docshare.tips/file.../229669551.pdf

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Old 07-18-2020, 09:14 AM   #19
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To me, deferring SS is nothing more than making a decision to buy a COLA adjusted life annuity... the benefits that I forgo are the installment "premiums" that I pay, and the increase in benefits vs taking earlier is the benefit.

With both deferring SS and a SPIA, if you die right after you pay the premium your IRR can be -100%.
You have made that analysis I think very well and I found it useful to quantify the intuitive insurance element.

Are you also "taking your chances" by not deferring SS?
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Old 07-18-2020, 09:17 AM   #20
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I purchased a delayed annuity that starts paying on my 62nd birthday 6 years ago. (1 month and 28 days till I get that 1st check!) It's a bit less than 10% of my portfolio at that time. The reason I invested in it is that SS at 62 + the annuity covers my basic expenses.
It was insurance. Things went great those first 7 years so it wasnt the best investment, but it was nice knowing that I only had to make sure the nut lasted till now and barring a bad inflation run I won't ever be living under a bridge.
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