SPIA as an 'asset protection' tool

[Lemonade]

The threads and stories about elder fraud are scary. I realize that a very small percentage of folks are victims, but can't avoid worrying for my 88 yr old relative. She has no dementia and understands the precautions to take to reduce her chances of being a victim (doesn't answer unknown phone numbers, isn't using email often, etc.) Still...the thought has occurred to me that using a large portion of her invested assets to purchase an SPIA would effectively eliminate the worry about being defrauded of her life savings.
What am I missing in a scenario like this?

 

[Koolau]

That sounds reasonable but there are some extremely smart people out there attempting to scam the elderly.

I thought I had "scam-proofed" my mom's finances, but an insurance salesman still "got" her (well, almost). She had applied for some insurance product and I co-signed the check for it. The company concluded that she was not eligible due to her dementia.

The sales guy brought the returned check to my mom and talked her into some ridiculous "other" product and he set the amount to exactly what the returned check would cover (my signature already on it)! I was not there and mom never told me about it.

Turns out she needed that money for her memory care stay (a couple of years later). I did some digging and figured out what had happened and called the company. They fell all over themselves refunding the money. (They all but begged me not to turn them in for fraud - which I did not. They swore they would discipline the sales rep. I wonder)?

 

[pb4uski]

I was recently appointed DPOA for my aunt and uncle. We were talking about this risk and I told them another benefit of me being DPOA is that if they get solicitations they can just tell them that their nephew manages their money for them so they can't do it.

 

[Koolau]

I was recently appointed DPOA for my aunt and uncle. We were talking about this risk and I told them another benefit of me being DPOA is that if they get solicitations they can just tell them that their nephew manages their money for them so they can't do it.

Yeah and I even got on my mom's checking account with my signature required for EVERY check. THAT put an end to a bunch of charities nickel anddiming her to death! BUT as pointed out in another thread, you STILL have to be careful. Not sure the POA would have done that but likely so.

 

[razztazz]

Capital idea. Sounds like something Mr Drysdale would have come up with. I am waiting to hear it picked apart.

 

[Dtail]

I was recently appointed DPOA for my aunt and uncle. We were talking about this risk and I told them another benefit of me being DPOA is that if they get solicitations they can just tell them that their nephew manages their money for them so they can't do it.

That is what my mom says, plus 60% of her investment accounts are in an irrevocable trust controlled by the siblings (effectively just me).

 

[zinger1457]

A SPIA for an 88 year old seems extreme. If going that route definitely want a SPIA with guaranteed payments or cash refund, otherwise if your 88 year old relative died a month after making the SPIA purchase all that money is gone.

 

[Lemonade]

@zinger1457, I would definitely make it a 10yr certain or life with refund.

I've read numerous times on financial sites that people say they'd get an SPIA in their 80s. Maybe to guard against mistakes made due to cognitive decline? Or just to simplify? I'm just wondering if doing it to protect against fraud is an over-reaction or not as safe as I might assume. Also, are there better alternatives like the above mentioned irrevocable trust, and if so, why would it be 'better'?

 

[pb4uski]

It wouldn't necessarily need to be a life contingent SPIA, it could be a period SPIA but someone of bad intent looking for a quick score might think it's not worth their effort and move on to another nark.

 

[jazz4cash]

Seems like some type of custodial account would be cheaper and more flexible

 

[Chuckanut]

Your story reminds me of something that happened about 30 years ago. A friend's widowed aunt had about 2 million dollars to live on after her hubby died.

She had two children a spederalla and a spendafella. In less than two years they had drained 1/2 million from mom. She could not say "NO!" to her children

Her nephew came up with the idea of locking the cash away by annuitizing it.

 

[jazz4cash]

For someone in their 60’s an annuity makes a lot more sense than it does for someone in their late 80’s.

 

[ncbill]

For someone in their 60’s an annuity makes a lot more sense than it does for someone in their late 80’s.

MaxiFi Planner advised me to annuitize anything left in my tax-deferred accounts, but not before age 80.

I'd still pick a 10-year or refund option, of course.

I don't think the mortality credits would be nearly as generous in my 60s.

 

[TheWizard]

I annuitized a hefty amount of my 403(b) with TIAA at start of retirement, age 63, in 2013.
After starting age 70 SS six years ago, I have excess income most months which I invest in my taxable account.

My remaining portfolio has grown considerably in retirement and is therefore making me an even better target for those elder scams the OP is talking about. But I'm not worried about it whatsoever...

 

[pb4uski]

For someone in their 60’s an annuity makes a lot more sense than it does for someone in their late 80’s.

Life annuity, yes. But why would a prayer to certain annuity not make sense for someone in their '80s? If they die the remaining benefit payments just go to their beneficiary. Avoids probate too.

 

[engineernerd]

The threads and stories about elder fraud are scary. I realize that a very small percentage of folks are victims, but can't avoid worrying for my 88 yr old relative. She has no dementia and understands the precautions to take to reduce her chances of being a victim (doesn't answer unknown phone numbers, isn't using email often, etc.) Still...the thought has occurred to me that using a large portion of her invested assets to purchase an SPIA would effectively eliminate the worry about being defrauded of her life savings.
What am I missing in a scenario like this?

The biggest downside for your relative would be the loss of flexibility to handle large unexpected expenses. To get a better handle on what such expenses might consist of, it might be worth consulting an elder-care or elder-law specialist. It sounds unlikely that she will need to move into a CCRC, but if there is one locally that she would like to enter if necessary, she/you could also investigate their financial requirements.

 

[athena53]

Certainly there are annuities that have a Guaranteed Minimum Death benefit so that provides some protection against losing the entire amount if you die a month later. There are also annuities guaranteed to pay either you or your heirs for X years. Both will carry lower monthly annuity payments to the owner than the annuities that stop when they die. My other concern would be that annuities pay a pretty nice commission to the sales person off the top so that's basically a sunk cost.

This is an issue I need to consider. Right now DS, my only child, has a Durable Power of Attorney that lets him take over any time with no need to prove that I'm losing my marbles. Not recommended for every parent but I'm fine with it. He hasn't sold the house out from under me yet- in fact, the original document is with me although DS knows where to find it. At some point I suppose I should hand over everything to him- it will be far simpler after I move to the retirement community near them and a single draw from my checking account covers nearly everything. "My son handles my finances" will be a good tactic when I start losing my abilities to handle my money. I'm not there yet.

 

[pb4uski]

... "My son handles my finances" will be a good tactic when I start losing my abilities to handle my money. I'm not there yet.

I would suggest that it is a good tactic even if you still have the ability to handle your own finances or even if it is untrue.

 

[jazz4cash]

Life annuity, yes. But why would a prayer to certain annuity not make sense for someone in their '80s? If they die the remaining benefit payments just go to their beneficiary. Avoids probate too.

I thought the riders for refund of unused premium were pricey. I think of annuities as guaranty to not run out of money. Using one to scam proof a portfolio is a bit odd. I think there are better ways to protect a nest egg from scammers or greedy relatives

 

[Lemonade]

@jazz4cash, I sure appreciate your response, so now I want more detail.

Can you suggest a couple ways to protect her nest egg that are better than investing in an SPIA? Can you be specific? You said 'some type of custodial account' - like what? I have POA on her accounts, but I'm younger and traveling and not checking daily. If she has say, $1M in taxable and she puts half into an SPIA, she'd still have a lot for unexpected large expenses. Short of divvying up her money into accounts at different firms, what measures can be taken to keep a large sum in one location safe?

 

[hotwired]

A SPIA for an 88 year old seems extreme. If going that route definitely want a SPIA with guaranteed payments or cash refund, otherwise if your 88 year old relative died a month after making the SPIA purchase all that money is gone.

My understanding is that these days, the majority of SPIAs are sold with a cash refund option or a 10-year period certain option, sometimes even longer. I don't think insurance companies really want people buying a policy where, if you walked out the door and got hit by the bus, they'd keep the money, because that would quickly give SPIAs an undesirable reputation. If you look at the pricing, the monthly payout on a plain vanilla SPIA versus one with 10-year period certain or a cash refund, they're very close. Stan, the annuity man, always recommends the cash refund. I always intuitively thought 10-year period certain would be better, but basically with the cash refund you take your starting principal and just deduct the monthly payments from that principal. That gives you your cash refund that goes to your beneficiary if you died before

 

[big-papa]

Life annuity, yes. But why would a prayer to certain annuity not make sense for someone in their '80s? If they die the remaining benefit payments just go to their beneficiary. Avoids probate too.

Not at all convinced it makes sense in your 60's - unless you want the possibility of decades of loss of purchasing power due to inflation since you can't buy true inflation adjusted annuities anymore. More sense in your 80's as they're cheaper to purchase, given your expected remaining lifetime, and less time for inflation to erode spending power as well. It's a possibility for a plan B for us if/when we get there, but other options can include extending our TIPS ladders - just depends on where we are, health and wealth wise at the time.

Cheers

 

[pb4uski]

Not at all convinced it makes sense in your 60's - unless you want the possibility of decades of loss of purchasing power due to inflation since you can't buy true inflation adjusted annuities anymore. More sense in your 80's as they're cheaper to purchase, given your expected remaining lifetime, and less time for inflation to erode spending power as well. It's a possibility for a plan B for us if/when we get there, but other options can include extending our TIPS ladders - just depends on where we are, health and wealth wise at the time.

Cheers

While I agree that inflation adjusted annuities are no longer available, you can design increasing benefit payments by a portfolio consisting of a life annuity and a series of deferred life annuities. So let's say that you are 60 and want $100/month and would like your benefits to increase 8% every 2 years. (I use $100 as a baseline to make the figuring easier ). You buy:

• A life annuity that pays $100/month
• A deferred life annuity that pays $8/month starting in 2 years
• A deferred life annuity that pays $17/month starting in 4 years
• Etc

That said, I think TIPS ladders are preferable for truy inflation adjusted income.

If someone does buy a life annuity in their 80s then I think a return of premium or minimum number of payments option makes sense, particularly if there are heirs to be considered.

 

[pb4uski]

I thought the riders for refund of unused premium were pricey. I think of annuities as guaranty to not run out of money. Using one to scam proof a portfolio is a bit odd. I think there are better ways to protect a nest egg from scammers or greedy relatives

I guess it depends on one's judgement of pricey and if one has heirs or charities to be considered. Below are monthly benefits for a SPIA for $100,000 for a 80 yo female.

 

[big-papa]

While I agree that inflation adjusted annuities are no longer available, you can design increasing benefit payments by a portfolio consisting of a life annuity and a series of deferred life annuities. So let's say that you are 60 and want $100/month and would like your benefits to increase 8% every 2 years. (I use $100 as a baseline to make the figuring easier ). You buy:

• A life annuity that pays $100/month
• A deferred life annuity that pays $8/month starting in 2 years
• A deferred life annuity that pays $17/month starting in 4 years
• Etc

That said, I think TIPS ladders are preferable for truy inflation adjusted income.

If someone does buy a life annuity in their 80s then I think a return of premium or minimum number of payments option makes sense, particularly if there are heirs to be considered.

Yes, you can put something together that has a rising glidepath of what is ultimately nominal payouts. And I would also agree that it would be better than a single purchase, with a flat payout that loses to inflation. I know of some who do something similar, except that instead of deferred annuities, they purchase a ladder of SPIAs "as they go" with the idea that the risk portfolio that funds the SPIA purchases at least has a chance of growing faster than inflation. That is, each new rung of the SPIA ladder can at least "catch up" to what was lost due to actual inflation at the point they were purchased, assuming one has the funds to make the purchase.

We own 3 TIPS ladders and agree about its usefulness. Of course, cost-wise, it doesn't benefit from a risk pool like a true inflation adjusted annuity would, but those aren't available in the US any longer. And even if they were, there would be the usual arguments about giving up principal in exchange for a potentially lower cost.

Whether or not it would make sense for somebody purchasing a life annuity to have a return of principal/minimum # of payments depends on a lot of different things. I, for one, would never annuitize very much of our total spending capacity as I have other resources that are already earmarked for heirs.

Cheers