Wade Pfau- How are annuities better (different) from bonds?

[jammes2014]

Those that do have SPIAs or are not entirely averse to having, would you have recommendations for a low-cost provider? I’m thinking of a purchasing a SPIA or perhaps a DIA (5-year deferred) from ImmediateAnnuities.com soon.
Thanks for your suggestions, jfb

 

[mathjak107]

they would be my choice

 

[Gill]

Those that do have SPIAs or are not entirely averse to having, would you have recommendations for a low-cost provider? I’m thinking of a purchasing a SPIA or perhaps a DIA (5-year deferred) from ImmediateAnnuities.com soon.
Thanks for your suggestions, jfb

As I indicated above, I've searched rates thoroughly over the last five or six years and have bought a number of SPIA's. I've bought a few through immediateannuities.com and also through Vanguard. Recently I have found Vanguard offers the best rates because of their reduced commission.
Bruce

 

[samclem]

I’m thinking of a purchasing a SPIA or perhaps a DIA (5-year deferred) from ImmediateAnnuities.com soon.
Thanks for your suggestions, jfb

If buying these, and depending on my situation, I would also consider:
- Buying them over time rather than all at once (rates will probably not be going down, but could be going up).
- Buying several from several highly-rated issuers rather than a single SPIA from one company. If there's no "volume discount", then getting diversification at zero cost seems prudent.
-Assuming these annuities are providing money for my "must have" spending, I would only consider an SPIA with payouts linked to inflation

 

[Gill]

I would only consider an SPIA with payouts linked to inflation

I would have to disagree with this statement. For one thing, you pay a very high price for inflation protection in an SPIA. Secondly, an SPIA can be viewed as fixed income with the inflation protection being achieved through an equity portfolio. That's the way I view my situation.
Bruce

 

[pb4uski]

Plus, there are not that many inflation adjusted annuities out there other than delaying SS.

While I agree that with a higher guaranteed source of income that one can increase investment risk/volatility and have the increased equities serve as a hedge to inflation, I wonder how many people actually do that.

 

[fritz]

Plus, there are not that many inflation adjusted annuities out there other than delaying SS.

While I agree that with a higher guaranteed source of income that one can increase investment risk/volatility and have the increased equities serve as a hedge to inflation, I wonder how many people actually do that.

+1 Buying annuities is kind of going in the opposite direction of taking on more investment risk (although in reality, you did).

 

[samclem]

I would have to disagree with this statement. For one thing, you pay a very high price for inflation protection in an SPIA.

Agreed, SPIAs with inflation protection appear to be expensive. But if the SPIA is being purchased expressly to fund "must have" nondiscretionary spending, it seems problematic to count on the other part of the portfolio for a big part of that necessary income. While it might start out small, the loss of purchasing power of the annuity payout could be significant over time (e.g. a loss of 50% over 15 years if inflation is just 5%). So, if we implicitly accept that the portfolio can be counted on to cover 50% (and eventually more) of the "must have" expenses, maybe we should just count on the portfolio to fund the whole thing and save a lot of costs/fees/loss of flexibility we get with an annuity.

We should ask ourselves why insurance companies need to reduce present annuity payouts so much if future payouts are adjusted for inflation. Answer: Because inflation is real, might get a lot worse, and hedging against it in an ironclad way ain't cheap.

Many people buy annuities to have a worry-free way of paying for their basic expenses. If they buy one without payout increases for inflation, then they've just traded worries--instead of fretting about the S&P 500 ups and downs, they get to worry about the CPI. And CPI has a much steadier record of staying on the "wrong" side of zero.

 

[Independent]

For one thing, you pay a very high price for inflation protection in an SPIA.

How do we define "high price" in that statement?
I might look at TIPS vs. regular treasuries and see if the SPIA rates reflect that difference, but I've never attempted that.

 

[mathjak107]

As I indicated above, I've searched rates thoroughly over the last five or six years and have bought a number of SPIA's. I've bought a few through immediateannuities.com and also through Vanguard. Recently I have found Vanguard offers the best rates because of their reduced commission.
Bruce

vanguard is okay for deferred annuity's , they are not the place for immediate annuity's . the best combo is the immediate ammuity non inflation adjusted and your own equity investing .

 

[MooreBonds]

How do we define "high price" in that statement?
I might look at TIPS vs. regular treasuries and see if the SPIA rates reflect that difference, but I've never attempted that.

Depending on what the insurance company is invested in, they may not have much exposure to their investments rising in value/payout with inflation if inflation is present. As such, if they want to be fiscally prudent, they would have to assume inflation most/all years when they price their annuity payouts - otherwise, they would be significantly short after just a few years.

So, this assumption would be reflected in their annuity 'price' (payout).

A TIP doesn't care what inflation comes out to, since its value is automatically adjusted for inflation, and it's much easier to see what the premium is for your real return. However, an inflation-adjusted annuity doesn't have a way to clearly see that premium/assumption, unless you are comparing a fixed annuity side-by-side to an inflation-adjusted one.

 

[Gill]

vanguard is okay for deferred annuity's (sic) , they are not the place for immediate annuity's (sic) . the best combo is the immediate ammuity (sic) non inflation adjusted and your own equity investing .

I'm sorry, but the facts are otherwise. Yes, Vanguard is great for deferred annuities but also they sell SPIA's through an outside agent and accept a reduced commission for doing so. As a result, their rates are better than any others I have found over the last several years.

Bruce

 

[Gill]

How do we define "high price" in that statement?
I might look at TIPS vs. regular treasuries and see if the SPIA rates reflect that difference, but I've never attempted that.

Price is simply the premium for the SPIA, or the corollary, which is the reduced benefit you accept for the inflation protection. You will find that is rather steep for inflation protected SPIA's.
Bruce

 

[pb4uski]

if you can even find them.

 

[Independent]

Price is simply the premium for the SPIA, or the corollary, which is the reduced benefit you accept for the inflation protection. You will find that is rather steep for inflation protected SPIA's.
Bruce

Have you looked at the similar premium for TIPS over regular Treasuries?
Is it also rather steep?

 

[Gill]

Have you looked at the similar premium for TIPS over regular Treasuries?
Is it also rather steep?

Yes, I have and, yes, it is.
Bruce

 

[Huston55]

The timing of when to buy that annuity always gave me trouble. The chances are that you may hit that hurdle deep in a bear market for stocks. Then do u sell everything and buy the annuity? Or wait ?


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Understood, and this is a common reaction to the "annuity hurdle" approach. Here are some thoughts to consider regarding that decision.

1. "Then do u sell everything and buy the annuity? Or wait ?"
This is a question asked by someone who still wants to take risk for a potential investment upside. It's not the best question for someone in a situation where s/he is considering an annuity to guarantee required income. Stated another way, if you're in a position requiring liquidation of all (almost all) assets to provide guaranteed income, you should strongly consider taking a "safety first" investing approach versus a "safe? withdrawal rate" approach.

2. Although possible, it's not likely that the drop in NW will happen all at once. So, incremental SPIA purchases (a SPIA ladder) would be more likely; and, also more desired anyway.

3. The timing question usually assumes/infers the sale of ALL assets to purchase an annuity (i.e.: an all or nothing decision). I think a sampling would reveal this is not the case. What is more common, in my experience, is partial annuitization with a remaining investment portfolio. This is the case for us; we would use <50% of assets to purchase a SPIA if required using the "annuity hurdle" approach.

I'm not trying to be an annuity cheerleader. But, I do think SPIAs are a tool that should be considered (in our case, they are a part of our backup plan). And, it's important to realistically consider things like: decumulation strategy, one's particular investment/income situation, and the most likely (not black swan) situation that will be faced when analyzing how to respond.

Food for thought. YMMV.

 

[Totoro]

I'm not trying to be an annuity cheerleader. But, I do think SPIAs are a tool that should be considered (in our case, they are a part of our backup plan).

As a lot of others said here as well, financially speaking it can be a good idea to offload longevity "risk" to someone else.

The older one gets, the higher the life expectancy variability and if you plan for best case (live long and prosper!) it can free up some cash for nice things today instead of having probably a large inheritance at the end. Depends on your perspective.

Emotionally there is something to be said for establishing a stream which looks reliable and steady, with somewhat reduced dependence on capital market returns.

 

[nun]

SPIAs have some nice features over other investments; they guarantee income for a specified period...that might be life; you can use them to provide guaranteed income for a survivor and initially they allow you to get more income than the prevailing return from safe fixed income investments.

There are drawbacks like loss of capital, that extra income is just return of capital and some mortality credits, no inflation adjustments.

Personally I'm a big fan of SPIAs to provide a base of retirement income. I'm lucky as I'll have 3 sources of essentially annuity income and I've got great deals on them; a state pension and SS checks from the US and the UK. Together these will provide more than enough to cover my living expenses and so I will be in a second accumulation phase after age 66. For me not having to rely on equity or bond investments to provide income makes retirement far easier.

 

[bmcgonig]

Understood, and this is a common reaction to the "annuity hurdle" approach. Here are some thoughts to consider regarding that decision.







3. The timing question usually assumes/infers the sale of ALL assets to purchase an annuity (i.e.: an all or nothing decision). I think a sampling would reveal this is not the case. What is more common, in my experience, is partial annuitization with a remaining investment portfolio. This is the case for us; we would use <50% of assets to purchase a SPIA if required using the "annuity hurdle" approach.





Food for thought. YMMV.

So what exactly would be your rules to purchase it? I always thought of the hurdle as being all or nothing, yes. I.e., if the value of ur portfolio is less than or equal to the cost of annuity to cover your expenses, the annuities. So how do u do it otherwise?


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[nun]

So what exactly would be your rules to purchase it? I always thought of the hurdle as being all or nothing, yes. I.e., if the value of ur portfolio is less than or equal to the cost of annuity to cover your expenses, the annuities. So how do u do it otherwise?


Sent from my iPad using Early Retirement Forum

My rules have been:

1) Limit annuity cost to a max of 25% of portfolio value.
2) Include the present value of the annuity in your fixed income asset allocation when rebalancing.
3) For me guaranteed income, pooled risk and mortality credits are the main reasons to buy an annuity. If you are worried low interest rates then you shouldn't be buying an annuity. Having said that my state pension buying and value of the UK state pension have been excellent.

 

[Huston55]

So what exactly would be your rules to purchase it? I always thought of the hurdle as being all or nothing, yes. I.e., if the value of ur portfolio is less than or equal to the cost of annuity to cover your expenses, the annuities. So how do u do it otherwise?


Sent from my iPad using Early Retirement Forum

First, thanks for asking this question. It's been a year or so since I evaluated this problem, and your question prompted me to go back to the Fullmer paper and Otar's book that are the basis of this part of our personal strategy.

The short answer is that, I will use two rules:
1. Otar's "Zone Strategy"
2. Fullmer's "Annuitization Hurdle" approach

With a reasonably balanced portfolio (say 60/40), you will almost certainly have adequate reaction time to (partially or fully) annuitize using these rules, before your assets are inadequate (inadequate=total annuitization of portfolio will not provide required income).

1. Using Otar's "Zone Strategy", you would be able to partially annuitize, with the ability to build an annuity ladder, if your assets moved from the "green" zone (abundant savings) into the "grey" zone (partial annuitization recommended), and well before the "red" zone (total annuitization required). Here's an example:

- 65yo single male w/ $2.7M portfolio (AA=60/40).
- Needs $100k/yr income from portfolio.
- With these numbers, he is barely in the "green" zone
- The S&P500 would have to drop >40% before he's in the "red" zone (total annuitization required)
- Therefore, he could partially annuitize as appropriate for his situation*, during any portfolio drop <40%.

* A key factor is how much other guaranteed income (SS, pensions, etc.) he has

2. Using Fullmer's "Annuitization Hurdle" approach is similar to what's above. You track portfolio value, on a regular basis, against the amount required to annuitize, and would partially (or wholly) annuitize based on your personal situation. There's a nice curve that illustrates this but, I can't seem to paste it here. I'll include it in another post if I can figure out how to copy/paste it here.

Hope this helps. Feel free to PM me if you have other questions or just want to discuss these concepts; being prompted to test my own plans is a healthy thing.

 

[Huston55]

So what exactly would be your rules to purchase it? I always thought of the hurdle as being all or nothing, yes. I.e., if the value of ur portfolio is less than or equal to the cost of annuity to cover your expenses, the annuities. So how do u do it otherwise?


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Here's the graphic illustrating the Fullmer Annuitization Hurdle concept described in my post above.

 

[bmcgonig]

Thanks for that. I'll read up on Fulmer.


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