SPIA substitute for Life Insurance?

[Gearhead Jim]

I'm 77, DW is 75. When I retired, taking the Contingent Annuitant option on my fixed pension would result a a huge drop in the monthly payout. Apparently the only people who took that option were guys already on death's door with young wives. So I took the full monthly payout and also bought a 20 year $500k term life insurance policy.

Now I'm nearing the end of the 20 year period and the policy will become unavailable. My casual research for another term policy, perhaps 10 years, shows very limited selection and high premiums. If I continue living, any life insurance premiums would be "wasted".

When I drop dead, my pension (about 25% of our income) will stop, and my wife will basically lose her smaller SS and pick up mine. She won't be destitute, but I'd like her to continue living nicely and not be a burden on our kids.

Buying a SPIA now could be used to replace some/most/all of the income lost when I die, except that we'd be getting money back right from the beginning, though usually no inflation protection.

I'd be interested in learning how to best do the comparison math on the SPIA vs continuing our current method of living on the pension + SS + gradually drawing down our investments (good for another ~20 years).

Current SPIA rates show an annual payout of ~$8,000/yr for every $100k premium.

 

[pb4uski]

Since you're using your own money either way it principally comes down to yield all else being equal. You can get a good idea of the interest rate being used in the SPIA by looking at the IRR of period certain annuities.

 

[Texas Proud]

So it sounds like you were ahead of the game by taking your full pension and buying the life insurance... when we did the calculation with my sister it was basically break even so she went with the option with her spouse... funny thing is that when her spouse died they upped her pension to her single only amount...


BUT, it also seems like you spent all the difference between contingent and single... IOW, you did not take into account that both of you might live more than 20 years... since the mid 80s is now the age to shoot for it turned out to be a bad bet...


I would do some math and calculate how much more you 'have' with the pension with only you... IOW, your pension minus dual pension - cost of term policy equals extra monthly income... now extra monthly income X 240 months X a factor for interest/gain gives you how much extra you should have...



Then use that number to see if you want to go the route of a new life insurance policy... BTW, I would also include what my chance of passing will be... if your health is good then you probably will make that 10 year mark and be in the same boat again....


OR, you can start putting money aside for your spouse that will be your own life insurance... go back to the contingent amount for your spending and any extra money into your 'life insurance' account... it will grow over time...

 

[Gearhead Jim]

I don't think the life insurance idea is viable, too expensive and limited.

OTOH, if I stay alive and continue to get my full pension for another ten years, that's ten years less that my wife will need to live off of our portfolio. Barring some major disaster, she should be ok at that point. Our drawdown on the portfolio is fairly small, the portfolio is about the value it had when I retired. Getting the larger pension has allowed us to leave more money in the portfolio, where it has grown very nicely.

If I put $100k (more) into a diversified portfolio, that should get us/her $4k per year including inflation.
If I put $100k into a SPIA, that would get us $8k per year but no inflation protection.

That's the comparison I'm pondering.
My crystal ball is cloudy today...

 

[MarieIG]

What income would your DW need to feel safe and secure if you were hit by a bus tomorrow?

Will your DW be able to handle a portfolio/ maximize returns in her later years?

What steps have you taken to ensure her income if she faces cognitive decline after you have shuffled off this mortal coil?

Since no one knows when you are going to die, wouldn't the math would be based upon statistical assumptions?

 

[RunningBum]

Perhaps leave her instructions on where/how/how much to buy an SPIA after your death. If you live long enough that it's no longer needed, tear up those instructions.

 

[ncbill]

There are many different flavors of SPIAs.

In the OP's case I'd pick the "life & 20-year certain" on both him & her instead of just life.

Payout's less than $8k annually on $100,000 invested, though.

 

[Texas Proud]

I don't think the life insurance idea is viable, too expensive and limited.

OTOH, if I stay alive and continue to get my full pension for another ten years, that's ten years less that my wife will need to live off of our portfolio. Barring some major disaster, she should be ok at that point. Our drawdown on the portfolio is fairly small, the portfolio is about the value it had when I retired. Getting the larger pension has allowed us to leave more money in the portfolio, where it has grown very nicely.

If I put $100k (more) into a diversified portfolio, that should get us/her $4k per year including inflation.
If I put $100k into a SPIA, that would get us $8k per year but no inflation protection.

That's the comparison I'm pondering.
My crystal ball is cloudy today...

Agree on the life insurance...



But I do not understand your example... where are you getting the $100,000 to put in a diversified portfolio? I would think that all your investments are in a diversified portfolio and there is not $100,000 laying around...


BUT, say you are talking about the same $100,000... either invested or SPIA... the big difference is that you have ZERO after your wife passes... with a portfolio you have a slim chance of zero but also a chance of having $300,000... the difference is the loss of capital...


SOOOO, put $100,000 in a diversified portfolio and take out $8,000 per year until you run out of money... IOW, do your own SPIA... I bet you never get to zero...

 

[pb4uski]

... SOOOO, put $100,000 in a diversified portfolio and take out $8,000 per year until you run out of money... IOW, do your own SPIA... I bet you never get to zero...

The IRR for a $100,000 deposit followed by 20 annual $8,000 withdrawals is 4.96%. IOW if your diversified portfolio yields 4.96% your balance will be zero after the 20th withdrawal... a higher yield and you would have more and a lower yield means that you would run out of money before the 20th withdrawal.

=RATE(20,8000,-100000,0) = 4.96%

 

[Gearhead Jim]

Agree on the life insurance...



But I do not understand your example... where are you getting the $100,000 to put in a diversified portfolio? I would think that all your investments are in a diversified portfolio and there is not $100,000 laying around...


BUT, say you are talking about the same $100,000... either invested or SPIA... the big difference is that you have ZERO after your wife passes... with a portfolio you have a slim chance of zero but also a chance of having $300,000... the difference is the loss of capital...


SOOOO, put $100,000 in a diversified portfolio and take out $8,000 per year until you run out of money... IOW, do your own SPIA... I bet you never get to zero...

The $100k is already part of a diversified portfolio, the choice is between leaving it in that portfolio or using that money to buy a SPIA.

The ~$8k per year from a SPIA is for two people with survivorship, so that full payment continues until both of us are dead.

Taking $8k per year from a $100k diversified portfolio is an 8% withdrawal rate, even with our reduced life expectancy that might run out of money.

A 4% portfolio drawdown exposes us to risk from inflation, and market behavior, and longevity risk (we outlive the money); as clearly shown over the last year.
The SPIA leaves only the inflation risk.
I'm trying to compare the two risks.

 

[rmorris50]

A SPIA is first and foremost longevity insurance. While I understand wanting a good return (payout) on the SPIA, the question really is how likely do you think it is your wife will live past her life expectancy. As an actuary who has worked with annuities many years, i would say you can prob expect to live to 87 and your wife 90, given your ages today. And i would expect the SPIAs to be priced with those kind of life expectancies in mind.

So I would suggest looking at your analysis from a longevity point of view, and just make sure the investment returns are “reasonable”. If you die first, how long will her new social security and draw down of remaining investments last? And weigh that assuming she lives to at least 90. If you want to protect her living to age 95 or even 100, the SPIA starts looking pretty attractive.

I would not go down the life insurance path at this age, too expensive.

 

[ncbill]

The $100k is already part of a diversified portfolio, the choice is between leaving it in that portfolio or using that money to buy a SPIA.

The ~$8k per year from a SPIA is for two people with survivorship, so that full payment continues until both of us are dead.

Taking $8k per year from a $100k diversified portfolio is an 8% withdrawal rate, even with our reduced life expectancy that might run out of money.

A 4% portfolio drawdown exposes us to risk from inflation, and market behavior, and longevity risk (we outlive the money); as clearly shown over the last year.
The SPIA leaves only the inflation risk.
I'm trying to compare the two risks.

Well, your guess is as good as anyone's.

Do you expect future annual inflation closer to the ~2% rate we saw pre-COVID?

Or closer to the ~8% spike we've seen coming out of it?

Then see if you can live with the projected loss in purchasing power over your remaining expected lifetimes.

 

[rkser]

SPIA looks a more reasonable choice at this point with a 8% draw down for a PART of your portfolio, although not indexed to inflation, but last life long.

The variability of stock & bond markets will be too much to handle as we age.

I wonder how the annuity payments would be calculated for the RMDs ?

 

[dknighd]

My first post here, I should have probably posted in the introduction forum first. I should go back and do that, and I will, but probably not today. Sometimes I drink when I think. A dangerous combination! In my mind SPIA, and term life insurance, are both insurance products. You buy them to insure your love ones will be OK. I cancelled our term life insurance policies when I thought I did not need them any more. We had enough money so that I could retire. So, financially it did not matter if I died tomorrow. I immediately bought a dual life SPIA. It is still an insurance policy. But now, instead of insuring I might die young, I'm insuring against living a long time. Perhaps the only insurance product I have ever bought that I hope to collect on! What is the secret, How create a new paragraph? If I had enough money, I would not buy SPIA or life insurance. But I'm much happier buying SPIA.

 

[dknighd]

I do not like dryer sheets. They stink. I wish my spouse would quit using them!

 

[Gumby]

..... What is the secret, How create a new paragraph? ....

To create a new paragraph, I just hit the Return/Enter key.

Just like this. And, if you cut dryer sheets in half, you could save money and put it in the pot for early retirement. Or don't use them at all and save even more money.