Annuities as an Investment

[Finance Dave]

I don't think 86 is an unusually old age, maybe you do. Since I don't think 86 is unusual, I look at the 6% IRR. What age do you base your calculations on when you do financial planning? I think that has merit.

I don't have the exact figures, but I recall reading many times that average life expectancy is x, but the average life span of someone already 60 is longer than x. Here is an article that talks this latter language. How long will older Americans live?

In other words, the second statistic removes people who die very young.

As to your choosing 86, I use 90. Why? Because I've seen 85 in much of the literature (don't have any handy), but I think I take better care of myself than most people my age, and my family history is pretty good.

Life expectancy is 77.8 years according to N C H S - FASTATS - Life Expectancy or a more recent study says just over 78 years Average U.S. Life Expectancy Tops 78, Mortality Falls In All Leading Causes Of Death, But Still Lags Behind 30 Other Countries - CBS News


Of course if you want to have a little fun, you can go here How Long Will I Live? - Life Expectancy Calculator and if you want to be morbid, you can go here The Death Clock - When Am I Going To Die?

Please note that although I included a bit of humor at the end, my post is intended to be serious and to help address some of your questions. I have not intended any portion of this to be offensive or rude in any way.

 

[2B]

Despite all the hostility shown toward SPIA's on this forum, it is interesting to note that a large portion of folks here (including 2B) claim they are delaying SS until age 70 (or even repaying previously collected SS payments), which, of course, is an annuity paid for by forgoing 8 years of SS payments. Of course, the SS annuity is cheaper (higher withdrawal rate) than buying one from Vanguard and is guaranteed by the US government rather than AIG. So I would conclude that the objection to commercially sold SPIA's is the cost and safety, not the basic principle.

I have said that many times. I would like to buy an annuity and just forget about it. Unfortunately, I have not found another annuity purchase other than delaying SS to be worth the cost. I will reevaluate my intent to delay SS to 70 based on the my health and that of DW.

What makes SS delay so beneficial financially is the 100% spousal benefit. Longevity does not run in my family but it does in hers. I've told her many times that we have plenty of money for my retirement but she may be in a tight spot someday.

 

[2B]

I don't have the exact figures, but I recall reading many times that average life expectancy is x, but the average life span of someone already 60 is longer than x. Here is an article that talks this latter language. How long will older Americans live?

In other words, the second statistic removes people who die very young.

As to your choosing 86, I use 90. Why? Because I've seen 85 in much of the literature (don't have any handy), but I think I take better care of myself than most people my age, and my family history is pretty good.

That's all factored into the actuarial tables. Obviously, someone that is already 99 has a much higher probability of living to be 100 than a newborn.

That is also why buying an annuity when young compounds the financial weakness of a SPIA. As RockOn repeats over and over, his IRR is over the 4% SWR even when buying an annuity at 56. He bases this on his assumption of living to 85. That's still outside the longevity for 56 YO males so he "feels lucky." Plug in 90, as you suggest, and we'd all be stupid not to pile on the annuity bus. No one in my family has lived past 85 and most of my immediate family died before they made it to 80. I don't feel like I've got the best set of dice to take the longevity gamble but I could be the family "winner."

When you start pushing 70, you have a much better idea of what your health is like and someone can make a better decision on their need for "longevity insurance." Since they are much older, the payout will be much higher. That's my first rule for evaluating a SPIA. Don't even consider a SPIA until you are 70 years old.

Right now we have lifetime low interest rates. Annuity payments will be based on the expected return of the insurance companies. They are heavily dependent on the current interest rate so my second rule is based on expected return. Don't consider a SPIA when 10 year US T-Bill interest rates are below the longterm average of about 6%.

I could go on but I'm sure RockOn will in my place.

 

[HFWR]

And then this image of HFWR singing came into my mind, unbidden:

Excuse me, while I quote myself

(sung to the tune of "Excuse me, while I kiss the sky
with sincere apologies to the late J. Hendrix)

O0

I was thinking more like Cleavon Little...

But Hendrix is good! Now if I could just play guitar like him...

[/digress]

 

[RockOn]

That's all factored into the actuarial tables. Obviously, someone that is already 99 has a much higher probability of living to be 100 than a newborn.

That is also why buying an annuity when young compounds the financial weakness of a SPIA. As RockOn repeats over and over, his IRR is over the 4% SWR even when buying an annuity at 56. He bases this on his assumption of living to 85. That's still outside the longevity for 56 YO males so he "feels lucky." Plug in 90, as you suggest, and we'd all be stupid not to pile on the annuity bus. No one in my family has lived past 85 and most of my immediate family died before they made it to 80. I don't feel like I've got the best set of dice to take the longevity gamble but I could be the family "winner."

When you start pushing 70, you have a much better idea of what your health is like and someone can make a better decision on their need for "longevity insurance." Since they are much older, the payout will be much higher. That's my first rule for evaluating a SPIA. Don't even consider a SPIA until you are 70 years old.

Right now we have lifetime low interest rates. Annuity payments will be based on the expected return of the insurance companies. They are heavily dependent on the current interest rate so my second rule is based on expected return. Don't consider a SPIA when 10 year US T-Bill interest rates are below the longterm average of about 6%.

I could go on but I'm sure RockOn will in my place.

Those were good points. I might get close to following your rules. I really don't think the payouts will go up that much when rates go to 6% but it is hard to check that out, there isn't readily available history for that, at least none I know of. I usually cannot post during the day since I still have to work but sometime over the weekend I will post a few calculation results getting back to the reasons I started this thread. That will be it for me.

 

[rs0460a]

That's my first rule for evaluating a SPIA. Don't even consider a SPIA until you are 70 years old.

Your opinion - not necessarily fact (please remember that I violated your "rule", and am pleased in doing so!)

When you have actually "lived" what you proposed (and can cite a "real life" example) I'll listen ...

Hey - what did you expect from me ...?

- Ron

 

[ERD50]

This is an unusually lucid explanation of what is for many people a difficult concept. Independent's entire post is excellent; I just didn't quote all of it.

I hope the thread will not be closed, because a) the topic is very important to retirees, even those who don't yet realize that it may be important; and b) people are being quite civil.

...

Ha

I agree that Independent's post is well written, informative and illustrative. I also agree that this thread has merit.

I will question the relevancy of Independent's post (w/o disagreeing with it, and still appreciating what it does tell us).

The 'problem' with this thread, as I see it, is that it is based on a financial comparison of two things that really cannot be compared. They are different 'products'. So the 'arguments' can go on forever (and do) .

One difference, one that is a personal consideration and not really something you can model financially, is that the annuity leaves your estate with nothing, while a portfolio is likely to leave your estate with a big stash. That might mean nothing to some, or be very important to others. Excel cannot give us an 'answer' to that, or to several other differences. Neither can Independent, 2B, RockOn, or ERD50. It's a personal decision.

What we can do, IMO, is take into account what we learn here, and consider if an annuity is appropriate for our situation.

Now, I *think* that RockOn's main point is, and it may be getting lost in the noise a bit, is that annuities are not necessarily the slam-dunk 'bad investment' that some say. I'll go along with that, and I will continue to evaluate them from time to time. For me, in my mid 50's, the answer right now is 'no'. But it is not 'never'.

-ERD50

 

[Alan]

Those were good points. I might get close to following your rules. I really don't think the payouts will go up that much when rates go to 6% but it is hard to check that out, there isn't readily available history for that, at least none I know of. I usually cannot post during the day since I still have to work but sometime over the weekend I will post a few calculation results getting back to the reasons I started this thread. That will be it for me.

I'm pleased to hear that someone else actually works when at work. I get up at 5 and get home at 5 (sometimes later) as I work 9 hour days so I can have every 3rd Friday off like today.

I really enjoy this forum, have learned a lot from the threads and am looking forward to ER time when I can spend much more time here.

 

[rs0460a]

One difference, one that is a personal consideration and not really something you can model financially, is that the annuity leaves your estate with nothing, while a portfolio is likely to leave your estate with a big stash. That might mean nothing to some, or be very important to others.

I will continue to evaluate them from time to time. For me, in my mid 50's, the answer right now is 'no'. But it is not 'never'.

-ERD50

Ah Ha! You understand! Each of us has to make our own decision, based upon the "filter" of our view of life.

For others who have generations beyond themselves that they wish to leave something, an annuity (e.g. SPIA) may not be the best product.

For a person retiring at 62-66, immediately drawing SS, and possibly having a pension, an SPIA may not be the best product.

For me? My DW/me do not look to leave any "estate value" (any residuial value is going to our named charities). Along with not drawing SS till 11 years after I retired, and no pension plan, a SPIA was a vehicle to "fit MY need".

That's what has to be kept in mind when you start talking about these vehicles. There is no "correct answer", other than "it all depends"...

- Ron

 

[Finance Dave]

Isn't it true that if you need LTC and don't have insurance, the nursing home can come after your portfolio, but not a fixed annuity? I mean sure, they can probably take the income stream if you owe it...but that seems a bit different than taking your portfolio. For example, if you go in for 2 years, they might go through your entire portfolio in that time, whereas with an annuity you'd continue to have income even after coming out of the nursing home.

I know one other advantage of annuities (at least fixed ones) is that they are "unattachable" in most states in the cases of bankruptcy or lawsuits.

Dave

 

[2B]

Isn't it true that if you need LTC and don't have insurance, the nursing home can come after your portfolio, but not a fixed annuity? I mean sure, they can probably take the income stream if you owe it...but that seems a bit different than taking your portfolio. For example, if you go in for 2 years, they might go through your entire portfolio in that time, whereas with an annuity you'd continue to have income even after coming out of the nursing home.

I know one other advantage of annuities (at least fixed ones) is that they are "unattachable" in most states in the cases of bankruptcy or lawsuits.

Dave

If you go into a Medicaid facility they will take any asset you have including the monthly social security and annuity checks since it is for your care. They aren't a "creditor" that you are protected from.

If you have a portfolio, you will get to spend it to avoid going into a Medicaid facility. I have seen a number of nursing facilities while dealing with my in-laws. They all are not places I want to go but I really don't want to go to a Medicaid facility. Personally, I'll be spending down my portfolio.

 

[2B]

Your opinion - not necessarily fact (please remember that I violated your "rule", and am pleased in doing so!)

When you have actually "lived" what you proposed (and can cite a "real life" example) I'll listen ...

Hey - what did you expect from me ...?

- Ron

Well, I'm a real life example. I haven't bought an annuity and have lived through the trauma. I have seen the financial impact that results from my father and FIL buying high fee variable annuities. I really, really hate these and see no redeeming value unless you are the seller.

There's nothing wrong with buying an annuity to make you "feel better." If that's the goal, you've apparently won. I won't discount the comfort of "money for life." I'm sure that is what motivated you.

What I won't concede is that they are "good investments" for most people. You trade a lump of cash for the promise of a lifelong income stream from an insurance company. Your money is as good as the credit rating of the company and the state insurance pool where you bought it.

They are competitive with self-annuitization only if one lives approximately 5 to 10 years beyond their mortality table lifespan and the company doesn't go belly up. RockOn keeps trying to bring up how great an investment they are because he will get a 6% return if he lives several years beyond the median (not mean) mortality age for his demographic.

 

[Dawg52]

For me, in my mid 50's, the answer right now is 'no'. But it is not 'never'.

-ERD50

Ditto.

 

[samclem]

If you have a portfolio, you will get to spend it to avoid going into a Medicaid facility.

One wrinkle: You can protect a portion of your portfolio by buying LTC insurance in a state partnership plan. E.g. If you buy $200K in LTC insurance, you can qualify for Medicaid coverage of your nursing home and still have $200K in your portfolio. This law/program came into force about 12 months ago, and states are still still working with insurers to get plans on the books. This will be a significant factor in my decisionmaking about LTC insurance.

 

[rs0460a]

I have seen the financial impact that results from my father and FIL buying high fee variable annuities. I really, really hate these and see no redeeming value unless you are the seller.

Wow - something we agree on!

- Ron

 

[2B]

One wrinkle: You can protect a portion of your portfolio by buying LTC insurance in a state partnership plan. E.g. If you buy $200K in LTC insurance, you can qualify for Medicaid coverage of your nursing home and still have $200K in your portfolio. This law/program came into force about 12 months ago, and states are still still working with insurers to get plans on the books. This will be a significant factor in my decisionmaking about LTC insurance.

When you go into a nursing facility, it's pretty much a decided you won't be leaving while still alive. I don't mean rehabilitative facilities that are usually covered by medical insurance. I mean the hospital beds, soiled diapers, mushy food, crazy rantings..... It's one of the lower levels of hell but the only thing most people did to go there was to live too long.

It also means you won't have much need for your portfolio.

Right now my plan is to self insure because I saw my father's LTC policy get "rerated" a few times. The premium got raised severely and the logical thing was to get a new policy. That also means you have to be healthy enough to get a new policy. He died in his condo so he fortunately wasted the money.

As I get older, I'll revisit the decision. Right now I can't see paying a company for something that is not likely to be needed for another 25 or 30 years. That's a long time to trust an insurance company.

One nice thing about coming from a family that doesn't live too long is that only two of my relatives have been in nursing facilities and their stays were only a few months.

Nursing facilities are a far cry from assisted living facilities but I'm not hoping to end up in one of these either. Their cost is about 60 to 70% of nursing care in the Houston area.

 

[Alan]

Right now my plan is to self insure because I saw my father's LTC policy get "rerated" a few times. The premium got raised severely and the logical thing was to get a new policy. That also means you have to be healthy enough to get a new policy. He died in his condo so he fortunately wasted the money.

As I get older, I'll revisit the decision. Right now I can't see paying a company for something that is not likely to be needed for another 25 or 30 years. That's a long time to trust an insurance company.

This is my view as well. Since I am planning on a portfolio to support $70K/year anyway, I expect to be able to cover nursing home costs if needed out of a seperate fund I started putting $200/mth into a few years ago.

October 4, 2004
Inflation may be under control, but [COLOR=red! important][COLOR=red! important]nursing [COLOR=red! important]home[/COLOR][/COLOR][/COLOR] costs continue to skyrocket. A major insurance company says the average daily cost of a private room in a nursing home in the United States is $70,080 per year, or $192 per day.
The highest rates were reported in the state of Alaska where the cost is $204,765 per year or $561 per day on average. The lowest rates were found in Shreveport, Louisiana at $36,135 per year or $99 per day.

 

[RockOn]

Now, I *think* that RockOn's main point is, and it may be getting lost in the noise a bit, is that annuities are not necessarily the slam-dunk 'bad investment' that some say. -ERD50

That's about it, as risk adverse as I am they might not be bad enough to stop me from buying one.

 

[RockOn]

RockOn keeps trying to bring up how great an investment they are because he will get a 6% return if he lives several years beyond the median (not mean) mortality age for his demographic.

I don't think I ever said they were a great investment. I think they are not a horrible investment and maybe a pretty good investment if you are risk adverse. I'm working on some numbers for a post to try to box in on that 6% so anyone interested can see how they fit in. It will not include every possibility as they are endless, just several to get a feel. It should be up a little later tonight.

It will be presented that to get a 6.40% IRR for a single person with no inflation protection the examples will show you have to live to around 86 if you take it out at 53. At age 78 it's 5.36%. If those type of returns are not your up of tea, you will not be interested. I'll have an example if you die at 70 or live to 94. Also an example of taking it out at age 43 or age 63. I hope this is helpful to some, I just wanted to see it myself.

One thing to remember about these returns, lower yields than stock market people talk about, is that this is a completely non-volatile return. That adds many bonus points for me, I don't know about you. Of course the insurance company must stay viable.

 

[73ss454]

Blah, Blah, Blah.

 

[FreeAtLast]

Anunities seem like a pension that you pay for. Hopefully it will be there when you need it. While you will be ahead if you live a long life, there is also more time for something to go wrong.

 

[RockOn]

IRR Calculations:

Ok I think I have this ready, quick and dirty, it may have a few errors. I used Vanguard (AIG) payouts my age of 53 with and without a spouse age 53. I think Vanguards payouts are somewhat higher than most, so beware. I used no inflation protection and 3% inflation protection. I could have used the CPI-U, it's about same as the 3% option but the payouts are not known for the calculation. For the married person I assumed keeping the same payout after the death of the first spouse. The four numbers under the age are the IRR's.


Here it goes:
...............................................Age at death 70...78...86...94
Single Person, No infl prot, Payouts till death, 2.60 5.36 6.40 6.87
Single Person, 3% Infl Prot, Payouts till death, 1.37 4.99 6.49 7.23

Married Person, No infl Prot, Payout till last death 1.12 4.14 5.32 5.87
Married Person, 3% Inf Prot, Payout till last death 0.00 3.63 5.32 6.17

Single person, 30 years guaranteed, 3% infl 4.71 in all cases, the term was set at 30

Taken out at age 43
Single Person, No infl prot, Payouts till death, 1.32 4.30 5.47 6.00
Single Person, 3% Infl Prot, Payouts till death, 0.00 3.52 5.22 6.08

Taken out at age 63
Single Person, No infl prot, Payouts till death, 4.70 7.12 7.99 8.35
Single Person, 3% Infl Prot, Payouts till death, 4.08 7.20 8.42 8.99

Note these returns are IRR'sof the investment. I know it has been said IRR isn't valid. I disagree with that. It is valid in a simple investment like this.

IRR is the internal yield of the annuity. I've been talking about 6% which requires me to live to ~86. I think the clearest way to state this is that if I put $100,000 in an annuity and live to 86 I will end up with 33 years of payments and have $0.00 left at the end. If I put the same amount of money in a mutual fund that returns 6% and take out the same payments fom the mutual fund as I was getting from the annuity, I will also end up with 33 years of payments and have $0.00 left at the end. A 6% IRR investment has the same investment characteristics as investing in a mutual fund that returns 6% per year. Maybe there is a better way to say this.

A few things jump out. (If anyone wants to know a specific situation, I have the calcs on a spreadsheet and could fire up yours in minute or two, let me know. )

With that, I'm done. I'm sorry for some of stuff losing alignment.


Just for info, the following were the payment amounts on the above 9 examples based upon investing $1 Million.....$73514, $52342, $64936, $44578, $43843, $66078, $43937, $86741, and $66455 respectively. The following were the initial withdrawal percentages.....7.3%, 5.2%, 6.5%, 4.5%, 4.4%, 6.6%, 4.3%, 8.7%, and 6.6%.

 

[Finance Dave]

If you go into a Medicaid facility they will take any asset you have including the monthly social security and annuity checks since it is for your care. They aren't a "creditor" that you are protected from.

If you have a portfolio, you will get to spend it to avoid going into a Medicaid facility. I have seen a number of nursing facilities while dealing with my in-laws. They all are not places I want to go but I really don't want to go to a Medicaid facility. Personally, I'll be spending down my portfolio.

I know that...you missed my point. What I'm saying is that after you leave the nursing home, if you had an annuity you would still have income...whereas with a portfolio they may have already taken all of it.

 

[Finance Dave]

Your money is as good as the credit rating of the company and the state insurance pool where you bought it.

You could say the same for your portfolio...it's only as good as the credit rating of where it's held/invested. If it's in stocks, it's only as good as the company. If it's in bonds, again only as good as the company's creditworthiness. If it's in a municipality, well...they go bankrupt too sometimes. If it's in a savings account at and FDIC bank, then you're at least safe up to $100,000.

 

[samclem]

You could say the same for your portfolio...it's only as good as the credit rating of where it's held/invested. If it's in stocks, it's only as good as the company. If it's in bonds, again only as good as the company's creditworthiness. If it's in a municipality, well...they go bankrupt too sometimes. If it's in a savings account at and FDIC bank, then you're at least safe up to $100,000.

All those who have all their money in one stock, raise your hand. One bond?
Wouldn't it be more correct to say that investing in an annuity is like deliberately putting all your money in a bank with no FDIC insurance? In both cases all the money rests with the fate of a single company, and you stand in line ahead of the stockholders if things go south.