Buying An Annuity at Later Age

[Gearhead Jim]

When I retired at 60, that seemed too young for DW (58, then) and I to want a SPIA. We have SS and a modest pension already, plus our IRA's.

But I planned to think about a SPIA a few years later. After all, our greater age should produce a higher income for a given investment.

Well, here I am age 67, and the monthly payout for a given SPIA investment is lower than it was 7 years ago when we were 7 years younger. Those low bond rates have been a very effective War on Savers.

I'm interested in everyone's thoughts on how this price/payout situation might play out in the future. Obviously, interest rates are an important component. But perhaps not the only thing...

 

[FinanceDude]

You will have to wait for interest rates to move up. SPIA payouts are directly tied to how much income the insurer can make on their investments for the spread. SPIA payments these days are probably the lowest they have been in decades. Add in increased longevity overall, and the result is what we see today........

 

[W2R]

SPIA prices are pretty bad right now. So, I feel pretty certain that they will eventually rise.

I am 64, and tentatively planning to get one when I am around 80 or 85, to cover my expenses in my old age. Personally I would not buy one at prices such as those we are seeing right now.

 

[HighRoller]

I agree with W2R, although I'm planning to buy in my early 70's, if interest rates are up enough.

 

[Midpack]

I wouldn't buy one at these interest rates to begin with, but even less so at my age, more like age 75 (as a plan B) or never if all goes well. But this is how I monitor my options. Using age alone to determine when/if to buy does not make sense to me...YMMV

http://www.schulmerichandassoc.com/Modern_Portfolio_Decumulation.pdf

 

[MichaelB]

If rates have fallen over the past 7 years, what is to say the next 7 will be any different? Annuity rates will always look bad because we compare them with investment returns which have higher risk.

If we wait until we need it, that would mean we are running out of money - can we then afford the annuity? Probably not.

The annuity is income insurance, and the best (as in least costly) time to buy is while we still don't need it, which is now. If we are concerned about rates, perhaps laddering or DCA'ing in equal amounts over the next few years will reduce that risk.

 

[braumeister]

If rates have fallen over the past 7 years, what is to say the next 7 will be any different?

This is a very hard problem.
The hardest lesson I had to learn when I started investing is that just because something has gotten really cheap is no reason it can't get a lot cheaper.

 

[Gearhead Jim]

If rates have fallen over the past 7 years, what is to say the next 7 will be any different? Annuity rates will always look bad because we compare them with investment returns which have higher risk.
...

Actually, my original post was comparing a SPIA available 7 years ago, with what's available today. Here's my numbers, for $100k invested in a lifetime SPIA that covers both of us:

2005, ages 60 and 58: $564/month from MetLife

2012, ages 67 and 65: $473/month from unknown immediateannuities.com writer

 

[Midpack]

Actually, my original post was comparing a SPIA available 7 years ago, with what's available today. Here's my numbers, for $100k invested in a lifetime SPIA that covers both of us:

2005, ages 60 and 58: $564/month from MetLife

2012, ages 67 and 65: $473/month from unknown immediateannuities.com writer

Yep. Here's a resource showing more history. Annuity Trends - Interest Rate Trends

While SPIA payouts could get worse from today (not significantly though), or (more likely) stay (historically) low for a long time, it would seem there's more upside than downside. The question is when will interest rates/bond returns improve (not for a few years at least IMO)? If rates/yields stay right where they are (interest rates can't go lower), a SPIA will cost less in the future just by virtue of fewer number of years left for the annuitant (my second graph above). Waiting should reduce SPIA cost, but you have to protect those funds in the meantime, that's not a given either.

However, if you're at or close to your personal annuitization hurdle now, even if you are comfortable managing your portfolio yourself, you're at a threshold where an annuity for floor income may be compelling.

There is no black & white answer for all circumstances. Many people (especially outside this ER community) cannot sleep at night without having floor income (or more) nailed down, nothing wrong with that, it is what it is.

I'm talking to much on this thread, so I'll quit here...

 

[REWahoo]

No matter what interest rates do, if you can hold off until your 80's the payouts get pretty darned good.

 

[W2R]

No matter what interest rates do, if you can hold off until your 80's the payouts get pretty darned good.

That's what I'm thinking, too. Plus, I'll need one in my 80's and later, should I survive that long. At that age, I think it would be pretty important to have a small annuity depositing money automatically in my checking account, enough to take care of my regular bills if/when I am ill, possibly bed-ridden, and so on.

 

[Sun456]

My crystal ball is cloudy, as it was 5 yrs ago when I first started looking at annuities. At the time Fidelity had a MetLife SPIA that looks like maybe where you got your first quote from.

Over the 5 yrs rates went up a bit for the products I eventually decided were most appropriate for me (deferred annuity) but then early last year (Jan. 2012) they started to go down. At the time I first started looking I thought the rates would go up so I held off. In addition I still wasn't comfortable purchasing them because I had unanswered questions and needed to do more research. They seemed too good to be true.

The one I was comfortable with, Prudential Highest Daily Lifetime 6 plus (6% guarantee accumulation per year), wasn't available to me until I turned 45 so I decided not to buy any until then. When I turned 45 it was down to 5% guarantee per year. I hemmed and hawed until a couple of days before they pulled the product from the market completely.

I ended up purchasing all 4 of my annuities on the downward swing in Q2 of this year (all the ones I bought have since reduced rates again). I missed the best rates by weeks in some instances. The way I talked to myself about it was, does the product meet my needs now? The answer for me then was yes it did, so I bought. However, it is a hard thing to get over losing out on the best rates by weeks when you finally decide to pull the trigger.

I would ask yourself. Does the current product meet a need in your portfolio? If not then don't buy it. If it does then purchase it. With a small pension in addition to SS maybe you don't need an annuity.

Here are my thoughts on future rates.
Annuities have changed quite a bit from products offered years ago with more twists and turns. The trick is to find ones that have things you want. From my own unscientific experience in researching them I think the bad rep. they have may be changing as people learn more about some of the benefits and as more people like myself approach retirement without any pensions. If they become more popular then the insurance company has no incentive to make them more attractive because people will buy them at the reduced rates.

The only way the insurance companies will raise the rates is when they stop being able to sell them because there are better alternatives in the market place for fixed income. Will it be in 10 or 20 yrs? Maybe 5? Who knows with the govt. interfering in the financial markets. How they unwrap themselves from what they are doing now without unintended consequences is beyond me.

Depending on what your looking for from your annuity you may want to consider:
- A long term bond if all your looking for is additional guaranteed income. Could lose alot of principal if rates go up but if your there for the income and that stays the same do you care? Be sure to read the thread on things likely to go away. I'd stay out of bonds for technology/telecom/financial companies. Utilities are probably the best bet.
- Preferred stocks. Income with potentially more liquidity than the bond. Risk losing the income if the stock is called. The longer rates stay low the higher the probability of this becomes.
- Deferred annuity if you want to lock in a rate with 'virtual gain' now and turn on income later. Higher rates than today's long term bonds. Probably lower than what will be in the future but then if we go the way of Japan maybe not. Some have an income doubler for nursing home or at home care (2 of mine have this) but then the rates are lower than for those without this feature. If you have good LTC insurance then maybe don't need this feature.

If you do decide to buy an annuity I would suggest spreading out your money to more than one company. Some of the companies I looked at were owned by the same parent. I wanted the money to be as independent as possible so I avoided buying from those owned by a company I'd already bought from.

Half the annuity sales people I talked to thought if I waited 5 yrs the rates would rise. The other half offered no opinion. I'm like braumeister. I've learned that waiting around for things to get back to where they were doesn't always work. If I found any annuity better than what I'd bought I would probably get another one but the market still seems to be trending down. However if we were older now then we could buy better rates so waiting may work in your favor just because you will be in another age band.

 

[mathjak107]

using the 30 year bond has a payout that will be almost 30-50% less then an annuity unless you spend principal..

sure you could spend the bonds principal down and up the payout but if you go longer then 30 years your income will take a hit if you needed to buy more bonds.

 

[obgyn65]

I also intend to continue buying deferred annuities early (until I am 55-60) and then buy SPIAs much later. My lifetime annual withdrawal increases by about 30% just by using this strategy.

Again, no heir here and little pension + low SS but large cash cushion so annuities make sense in my case. Not for everyone,

No matter what interest rates do, if you can hold off until your 80's the payouts get pretty darned good.

 

[haha]

I also intend to continue buying deferred annuities early (until I am 55-60) and then buy SPIAs much later. My lifetime annual withdrawal increases by about 30% just by using this strategy.

Again, no heir here and little pension + low SS but large cash cushion so annuities make sense in my case. Not for everyone,

Being a Doc, shouldn't you have near max SS?

Ha

 

[obgyn65]

Being a Doc, shouldn't you have near max SS?

Ha

No because I only worked about 10 years in the US. The rest was abroad.

 

[haha]

No because I only worked about 10 years in the US. The rest was abroad.

Thanks. So you have your US minimum quarters anyway. Will you get some sort of pension from your foreign employment? Ha

 

[obgyn65]

Yes and from two European countries, including the UK state pension.

Thanks. So you have your US minimum quarters anyway. Will you get some sort of pension from your foreign employment? Ha

 

[Independent]

When I retired at 60, that seemed too young for DW (58, then) and I to want a SPIA. We have SS and a modest pension already, plus our IRA's.

But I planned to think about a SPIA a few years later. After all, our greater age should produce a higher income for a given investment.

Well, here I am age 67, and the monthly payout for a given SPIA investment is lower than it was 7 years ago when we were 7 years younger. Those low bond rates have been a very effective War on Savers.

I'm interested in everyone's thoughts on how this price/payout situation might play out in the future. Obviously, interest rates are an important component. But perhaps not the only thing...

One good question is "What would you sell to raise the cash to buy an SPIA?"

If you think of SPIAs as part of your fixed interest asset group, you would probably sell bonds. If those are longer bonds, they have higher market prices today than they would have if interest rates went up.

So SPIAs get cheaper at the same time your bond market values drop. That pretty much eliminates the argument for waiting on the SPIA until interest rates go up.

BUT .... the SPIA is probably priced off longer bonds than the average in you current asset mix. So it's likely the SPIA prices will drop faster than your specific bonds. You'd have to check this.

Then there's the whole question of whether you need longevity insurance. Like any other insurance, the insurance company is taking a slice of the action. I would only buy as much as I need. Maybe SS and the pension are already enough lifetime income, maybe they aren't.

 

[Midpack]

So SPIAs get cheaper at the same time your bond market values drop. That pretty much eliminates the argument for waiting on the SPIA until interest rates go up.

BUT .... the SPIA is probably priced off longer bonds than the average in you current asset mix. So it's likely the SPIA prices will drop faster than your specific bonds. You'd have to check this.

And even if interest rates stay the same, SPIA prices will drop by virtue of aging of the annuitant. Not trying to talk anyone into or out of a SPIA, but IMO there are two influences that argue for waiting (interest rates, and age itself). YMMV