Kimo
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I am quite happy with my Vanguard annuities. They operate quite differently and might be worth a look...
You are certainly correct, and I agree. But a big difference is if you get suspicious getting rid of the bond funds is a keystroke and a small commission away. For this reason I think a commitment like a SPIA is categorically different, and inferior, to other fixed income possibilities. In any case, a 5 year duration would be a long time for me. I've had some intermediate term bond funds with effective durations mostly between 3 and 4. I bought them at higher quotes than today, but even with weak price action over the last 6-8 months I am still well ahead of any cash type investment.+1. But that risk exists with long bonds (& funds) as well. Locking in to a ~4-5% yield, even assuming holding safe indiv long bonds to maturity, risks a huge loss of purchasing power over time if inflation goes back to double-digits (as too many of us can recall ).
Link sent via PMCould you give a link to a reputable broker of these things? I know they must exist, because my free UHF TV channels always feature ads offering to take those pesky annuities or structured settlements off people's hands.
BTW, I think annuities have a giant elephant in the room risk that rarely gets deeply considered. A person does not have to be crazy to expect a humdinger inflation at some point near or far in our future.
Ha
Not necessarily true.
We have a joint/life guaranteed term SPIA and it was very easy to calculate the base IRR. Simply plug in the premium, the total annual payments, and the number of term/years (cells) on a spreadsheet.
We know the minimum return, since our guaranteed term (either we get paid, or our estate does) establishes a minimum period of payments.
And if either/or live beyond the minimum term (calculated at 28 years for us)? The calculated return actual rises.
We can't outlive our SPIA; however if our SPIA "outlives" us, there is residual value that goes to our estate.
As far as IRR vs. payment? You are correct; IRR must be computed for any SPIA product in order to make correct comparisions. Also, folks forget that an SPIA is an income product, not an investment product. It's not there to make you money but rather an instrument in your retirement toolbox to provide you with distribution of investment proceeds over a period of time. That's why our current SPIA was purchased with only 10% of our then current joint portfolio value at retirement (early 2007). The remaining 90% of our portfolio stays invested (relative to our AA) and does the heavy lifting for the future.
I think you got my point, that the ending final IRR of your SPIA can only be calculated after it's done paying. hopefully that's well more than 28 years.
The guaranteed IRR, depending on when you bought it, was most likely in the 1.5 to 2.5% range, which is not really a very competitive return.
As with most annuities, they really should not be considered 'investment' products because they are truly 'insurance'. You're buying some level of insurance with the premium, which ALSO happens to have some (restricted) returns. In the case of your SPIA, the insurance comes into play in yours after 20 years, and the first 20 year guarantee is simply a protection of your assets for your heirs.
Very true. Can one reduce the inflation risk by purchasing smaller annuities over time instead of a bigger one at one time? I assume if inflation should jump to 10+ percent for any length of time the new annuities would pay more for the same amount of dollars invested. Or not? My annuity, FWIW, is getting SS at 70. And having a chunk of my assets in PSSSTTT Wellesly. Diversification of income sources is still high on my list of investment rules.BTW, I think annuities have a giant elephant in the room risk that rarely gets deeply considered. A person does not have to be crazy to expect a humdinger inflation at some point near or far in our future. Ha
IRR calculated at 4.79% over 28 years.The guaranteed IRR, depending on when you bought it, was most likely in the 1.5 to 2.5% range, which is not really a very competitive return.
The problem is now you have an investment vehicle. It only makes sense if you can live on only the interest the CD is throwing off.Especially when you can lock in 3% at PenFed in an insured 5 year CD and get to keep your principal.
July, 2007. I/DW were both age 59 at that time.When did you buy it? Quite a while ago when interest rates were higher?
I should start by saying that this critique and the Money's Worth Ratio is the most useful thing I have ever seen written about annuities. For a potential buyer, the idea is not to find a "fair value" whatever that is supposed to mean, but to see if what is being offered makes sense from the principles of annuitization. It is not your issue to allow for some bloated insurance company's costs. Your issue is to compare those that you are offered, and if still interested, all other things being equal, take the highest money's worth ratio between what you are being offered, and what is available. I think in general, most informed people would pass.While I would agree that Mandell is off-the-wall, I would object to the notion in the Money's Worth Ratio that a ratio of one (where the premium equals the expected present value of contractual benefits using the investment earnings rate of the assets backing the annuity) as being "actuarially fair". A ratio of one would be skewed to the purchaser of the annuity.
To be fair, the calculation needs to consider at least two additional items, only one of which is mentioned in the book. First are expenses of the issuer, including marketing, commissions, and other expenses of running the block and a fair share of overhead costs of the issuer. Second, and more important, is the cost of capital of supporting the block. Unlike a mutual fund, an insurer needs to hold assets in addition to those backing the annuity reserves and the providers of that capital expect a fair return on it. That capital is at risk if actual mortality for the block is lower than what was provided for in pricing the annuity and benefits payments are more than what was priced for.
As a result of the need for pricing to cover expenses and cost of capital in addition to providing for annuity benefits, the notion if a money value ratio of one being fair is bunk.
Agreed. That was an incredibly informative article and I bookmarked it. Thanks 2B for sharing it.I should start by saying that this critique and the Money's Worth Ratio is the most useful thing I have ever seen written about annuities. For a potential buyer, the idea is not to find a "fair value" whatever that is supposed to mean, but to see if what is being offered makes sense from the principles of annuitization. It is not your issue to allow for some bloated insurance company's costs. Your issue is to compare those that you are offered, and if still interested, all other things being equal, take the highest money's worth ratio between what you are being offered, and what is available. I think in general, most informed people would pass.
There may be special situations, the most likely I can think of is to avoid a one-off wealth tax. The authorities might have a hard time assessing and collecting on an annuity contract. SPIAssometimes have uses as judgment proofing when someone is at risk from lawsuits.
Another aspect is that much of what an annuity can do, even when things go well, can be simulated by a combination other cheaper investments, and a lower standard of living. Under current conditions, the annuity buyer says , well I don't have to lower my sol. But he forgets or ignores that any meaningful inflation will lower it for him big time. When I was a young guy, I dealt with many people of the generation who were clobbered by the big inflation of the 70s, and years of steady inflation at lower levels prior to that. Most of us are children of years of falling inflation, and our fears are different. But not many generations' fears turn out to be complete, and I doubt that ours will either.
Ha
I said in my post that some people feel comfortable with them. That is a personal issue.I am going to present my defense of SPIA based on one basic fact - it is the one investment one can make with the most predictable of cash flows over the entire retirement period and you can decide if the withdrawl rate you can earn from an SPIA investment is acceptable or not.
The 10 year treasury on January 1st 1964 was 4.17% A 10 year ladder at the time would have been earning 3.67%, slightly higher than a 10 year ladder of 10 year bonds would have produced at the start of 2013. I am quite certain that a 3.1% withdrawl rate is not sustainable with an initial 3.67 payout from fixed incomeI said in my post that some people feel comfortable with them. That is a personal issue.
You had a long example during the worst increase in inflation our country has faced since the late-1800s. I wonder what the answer would be if a ladder of 10 yr treasury bonds were used instead of a one time purchase of the annuity. After all, the $250,000 had to come from somewhere. I also have no clue whether the annuity rate you used was correct (up or down) at the beginning of your term. My recollection of interest rates in the late 60's has the 10 yr treasury above 6%. Mortgages were definitely above 6%.
If I adjust my plan to starting on 1/1/1968 by 1/1/1983 spending needs go from 7,812.50 to $22,567.13. It took only 12 years to be spending more than the annuity paid out. However, the retiree would still not have been forced to decrease spending adjusted for inflation up to age 95.From 1/1968 to 1/1983, cumulative inflation rate was 187%. This means that in a mere 15 years, a dollar became 1/(2.87) = 35 cents. Not all of those years saw inflation in the double digit range. The highest was 13.5% in 1980, but only 3.2% in 1972, and 4.2% in 1968. It's the compounding effect that made it so bad.
Both stock and bond returns barely match inflation in the above period, but it was still better than holding cash, and annuities too I would think.