TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

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Northern Flicker
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TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by Northern Flicker »

The following TIAA white paper quantifies potential benefits of including fixed annuities and lifetime income products in retirement portfolios. I would expect stable value funds to have similar properties. (Caveat: TIAA is of course not an unbiased disinterested party with this).

https://www.tiaa.org/public/pdf/insight ... ced-td.pdf
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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Horton
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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by Horton »

Northern Flicker wrote: Fri Jun 11, 2021 3:54 pm I would expect stable value funds to have similar properties.
My stable value option currently yields about half TIAA Traditional, so I’d rather the TDF in my 401k use a bond fund.

(I’m basing this on my FIL’s minimum yield of 3% in TIAA Traditional.)
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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by pkcrafter »

Thanks for the link, probably worth looking into.

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Northern Flicker
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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by Northern Flicker »

Horton wrote: Fri Jun 11, 2021 6:53 pm
Northern Flicker wrote: Fri Jun 11, 2021 3:54 pm I would expect stable value funds to have similar properties.
My stable value option currently yields about half TIAA Traditional, so I’d rather the TDF in my 401k use a bond fund.

(I’m basing this on my FIL’s minimum yield of 3% in TIAA Traditional.)
Well sure, a product needs to have a competitive yield/return to be effective. The white paper also discusses lifetime income annuities, which can be purchased in an IRA or taxable account. MYGA's and are another type of fixed annuity. Annuitizing some of one's fixed income assets with a SPIA may improve portfolio efficiency for a retiree.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by Stinky »

Northern Flicker wrote: Fri Jun 11, 2021 3:54 pm The following TIAA white paper quantifies potential benefits of including fixed annuities and lifetime income products in retirement portfolios. I would expect stable value funds to have similar properties. (Caveat: TIAA is of course not an unbiased disinterested party with this).

https://www.tiaa.org/public/pdf/insight ... ced-td.pdf
Thanks for posting the link.

I've never studied TIAA annuities, since my workplace plan weren't from TIAA and I'm not a TIAA policyholder. However, I know from reputation that TIAA is an excellent company, delivering great value to its policyholders.

That being said, I wonder whether the conclusions that the paper reaches are generally applicable to fixed annuities issued by other companies. Or, ?are the conclusions specific to TIAA, because of its superior products?

Does anyone have an opinion?
It's a GREAT day to be alive! - Travis Tritt
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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by Wrench »

Stinky wrote: Sat Jun 12, 2021 5:41 am
Northern Flicker wrote: Fri Jun 11, 2021 3:54 pm The following TIAA white paper quantifies potential benefits of including fixed annuities and lifetime income products in retirement portfolios. I would expect stable value funds to have similar properties. (Caveat: TIAA is of course not an unbiased disinterested party with this).

https://www.tiaa.org/public/pdf/insight ... ced-td.pdf
Thanks for posting the link.

I've never studied TIAA annuities, since my workplace plan weren't from TIAA and I'm not a TIAA policyholder. However, I know from reputation that TIAA is an excellent company, delivering great value to its policyholders.

That being said, I wonder whether the conclusions that the paper reaches are generally applicable to fixed annuities issued by other companies. Or, ?are the conclusions specific to TIAA, because of its superior products?

Does anyone have an opinion?
I am a participant in a TIAA plan, and frankly, I am not a fan. Fees are high, service is OK, but not great and the annuitization is not to my liking. My prior plan that started as Aetna, then ING and now VOYA IMO is superior. So, to answer your question, I do believe the conclusions are valid across companies, essentially because I believe the products at TIAA are pretty ordinary, at least compared to other 403B plans. TIAA does do a great marketing job though, convincing people they are "the great protectors" of teachers and other public employees.

Wrench
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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by gjlynch17 »

Stinky wrote: Sat Jun 12, 2021 5:41 am
That being said, I wonder whether the conclusions that the paper reaches are generally applicable to fixed annuities issued by other companies. Or, ?are the conclusions specific to TIAA, because of its superior products?

Does anyone have an opinion?
I believe the conclusions (at least with respect to SPIAs) are applicable to other annuities. Wade Pfau had a fairly comprehensive paper in 2012 that concluded that the "efficient frontier" for a retiree consisted of stocks and SPIAs (no bonds)

https://papers.ssrn.com/sol3/papers.cfm ... id=2151259

Michael Kitces has also written about why mortality credits make SPIAs superior to bonds for retirees:

https://www.kitces.com/blog/understandi ... nt-income/

Lauren Minches, former VP of Marketing for Blueprint prior to their sale to Mass Mutual has a good marketing white paper using the research of Pfau and others on coming up with a framework for transitioning from bonds to SPIAs:

https://abaris-static-content.s3.amazon ... uities.pdf

Even though I am convinced SPIAs and/or DIAs should be part of my "portfolio" at some point, my question is when. I am building a rolling fixed income ladder of primarily MYGAs (thank you for sharing your wisdom Stinky!), defined maturity ETFs and duration matched funds until age 70 when I intend to start taking social security and a pension and reexamine the issue at that point. However, I really have no data or sold theoretical basis to support that plan so I would welcome the experiences and insights of others on how they have used SPIAs/DIAs and when they have purchased them.
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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by gjlynch17 »

gjlynch17 wrote: Sat Jun 12, 2021 7:10 am
Stinky wrote: Sat Jun 12, 2021 5:41 am
That being said, I wonder whether the conclusions that the paper reaches are generally applicable to fixed annuities issued by other companies. Or, ?are the conclusions specific to TIAA, because of its superior products?

Does anyone have an opinion?
I believe the conclusions (at least with respect to SPIAs) are applicable to other annuities. Wade Pfau had a fairly comprehensive paper in 2012 that concluded that the "efficient frontier" for a retiree consisted of stocks and SPIAs (no bonds)

https://papers.ssrn.com/sol3/papers.cfm ... id=2151259

Michael Kitces has also written about why mortality credits make SPIAs superior to bonds for retirees:

https://www.kitces.com/blog/understandi ... nt-income/

Lauren Minches, former VP of Marketing for Blueprint prior to their sale to Mass Mutual has a good marketing white paper using the research of Pfau and others on coming up with a framework for transitioning from bonds to SPIAs:

https://abaris-static-content.s3.amazon ... uities.pdf

Even though I am convinced SPIAs and/or DIAs should be part of my "portfolio" at some point, my question is when. Minches' paper has a "rule of thumb" that advocates starting with SPIAs at a very early age (50% of fixed income) and transitioning to all SPIAs by age 65. The paper mentioned that there would be a future study to test their rule of thumb but I have not seen any publication of it if it was done.

I am building a rolling fixed income ladder of primarily MYGAs (thank you for sharing your wisdom Stinky!), defined maturity ETFs and duration matched funds until age 70 when I intend to start taking social security and a pension and reexamine the issue at that point. However, I really have no data or sold theoretical basis to support that plan so I would welcome the experiences and insights of others on how they have used SPIAs/DIAs and when they have purchased them.
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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by grok87 »

Northern Flicker wrote: Fri Jun 11, 2021 7:54 pm
Horton wrote: Fri Jun 11, 2021 6:53 pm
Northern Flicker wrote: Fri Jun 11, 2021 3:54 pm I would expect stable value funds to have similar properties.
My stable value option currently yields about half TIAA Traditional, so I’d rather the TDF in my 401k use a bond fund.

(I’m basing this on my FIL’s minimum yield of 3% in TIAA Traditional.)
Well sure, a product needs to have a competitive yield/return to be effective. The white paper also discusses lifetime income annuities, which can be purchased in an IRA or taxable account. MYGA's and are another type of fixed annuity. Annuitizing some of one's fixed income assets with a SPIA may improve portfolio efficiency for a retiree.
the trouble is the pricing. still waiting to see insitutional pricing for immediate income inflation-indexed annuities offered as in-plan options in 401k plans
RIP Mr. Bogle.
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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by grok87 »

Wrench wrote: Sat Jun 12, 2021 6:17 am
Stinky wrote: Sat Jun 12, 2021 5:41 am
Northern Flicker wrote: Fri Jun 11, 2021 3:54 pm The following TIAA white paper quantifies potential benefits of including fixed annuities and lifetime income products in retirement portfolios. I would expect stable value funds to have similar properties. (Caveat: TIAA is of course not an unbiased disinterested party with this).

https://www.tiaa.org/public/pdf/insight ... ced-td.pdf
Thanks for posting the link.

I've never studied TIAA annuities, since my workplace plan weren't from TIAA and I'm not a TIAA policyholder. However, I know from reputation that TIAA is an excellent company, delivering great value to its policyholders.

That being said, I wonder whether the conclusions that the paper reaches are generally applicable to fixed annuities issued by other companies. Or, ?are the conclusions specific to TIAA, because of its superior products?

Does anyone have an opinion?
I am a participant in a TIAA plan, and frankly, I am not a fan. Fees are high, service is OK, but not great and the annuitization is not to my liking. My prior plan that started as Aetna, then ING and now VOYA IMO is superior. So, to answer your question, I do believe the conclusions are valid across companies, essentially because I believe the products at TIAA are pretty ordinary, at least compared to other 403B plans. TIAA does do a great marketing job though, convincing people they are "the great protectors" of teachers and other public employees.

Wrench
Could you elaborate please on what you don't like about the annuitization?
RIP Mr. Bogle.
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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by dbr »

Delaying Social Security and having a company pension that did not offer a lump sum option has resulted in major annuitization for us. I'll take it that way gladly.

Obviously it makes the model for retirement withdrawals fairly complex, but that is what models are for. It also affects the planning should one if us pass as the SS and pension income change for the survivor -- another scenario to model.
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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by Horton »

Stinky wrote: Sat Jun 12, 2021 5:41 am That being said, I wonder whether the conclusions that the paper reaches are generally applicable to fixed annuities issued by other companies. Or, ?are the conclusions specific to TIAA, because of its superior products?

Does anyone have an opinion?
To answer your question on fixed annuities, show me a stable value option or MYGA (from a company with a similar credit rating as TIAA) yielding anything close to TIAA traditional.

For immediate and deferred annuities, IIRC TIAA is experiencing lower annuity take rates now compared to the past. Is it due to the fact that balances are higher and there’s less need for annuitization? Is it because fewer people have pension benefits and so consequently there’s less interest in general in annuities? Is it because of low interest rates? I don’t know, it’s probably a combination of all the above plus some other factors.

People generally do not like annuities, including SPIAs. That’s why it’s called the “annuity puzzle.” I don’t think you solve it by adding them to a TDF product (ie, let me just stuff this thing that I think you need, but you don’t want, into your default product without your full knowledge and consent). If anything, TDFs with annuity features will be designed as opt-in, rather than opt-out, and that means they probably won’t be utilized significantly.
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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by Stinky »

Horton wrote: Sat Jun 12, 2021 8:51 am
Stinky wrote: Sat Jun 12, 2021 5:41 am That being said, I wonder whether the conclusions that the paper reaches are generally applicable to fixed annuities issued by other companies. Or, ?are the conclusions specific to TIAA, because of its superior products?

Does anyone have an opinion?
To answer your question on fixed annuities, show me a stable value option or MYGA (from a company with a similar credit rating as TIAA) yielding anything close to TIAA traditional.
That’s been my impression also. From what I’ve seen posted on the Forum, the rates credited by TIAA are attractive compared to any other company.

And TIAA’s ratings are just about the highest possible. So that makes the combined interest rate/rating offered by TIAA extremely compelling for those who have access to it.
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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by Horton »

Here’s one of my favorite articles on annuities (see page 18):

https://www.soa.org/globalassets/assets ... -iss97.pdf

Some excerpts:
As we developed that study, we became increasingly disillusioned with the standard academic approach to annuitization, in which an optimal strategy is determined by maximizing the expected discounted utility, typically assuming a constant relative risk aversion (CRRA) utility function. In almost every case, across hundreds of published academic papers, the result of this exercise indicates that the optimal strategy is full annuitization of pension assets. The disparity of these results with the real- world fact that very few people purchase annuities has been dubbed the “annuity puzzle.”
The underlying premise of the annuity puzzle is that maximizing the expected discounted CRRA utility generates results that are both normative (how people should behave) and descriptive (how people do behave), and that there is therefore no explanation for the failure of millions of retirees to purchase annuities. It seemed likely to us that, in fact, discounted CRRA utility may be neither descriptive nor normative, and that individuals who do not purchase annuities may be making rational decisions but based on an objective function that is not (yet) captured by economic models. A survey seemed the best way to determine, at least, whether the annuity puzzle assumptions are descriptive.
Respondents really don’t like annuities. When given a hypothetical amount of money available to them at their hypothetical retirement, 84 percent would not pay even half of market price for a life annuity, and most wouldn’t buy one at any price. The reasons given included fear of default of the annuity provider (respondents were unaware that annuity income from Canadian insurers is protected in the event of default) and loss of financial security—that is, for the respondents, there is more security in having the assets available instantly than in having them converted to an income stream. Several respondents referred to annuities as a gamble, and some as a “scam.”
I was also surprised that so many respondents were willing to choose the risky retirement income stream over the steady one. I expected people to be more concerned about the possibility of low income, but there was a distinct attraction for many respondents to the cases where one or two paths looked really, really good, even where the other paths looked really bad.
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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by TN_Boy »

Horton wrote: Sat Jun 12, 2021 9:04 am Here’s one of my favorite articles on annuities (see page 18):

https://www.soa.org/globalassets/assets ... -iss97.pdf

Some excerpts:
As we developed that study, we became increasingly disillusioned with the standard academic approach to annuitization, in which an optimal strategy is determined by maximizing the expected discounted utility, typically assuming a constant relative risk aversion (CRRA) utility function. In almost every case, across hundreds of published academic papers, the result of this exercise indicates that the optimal strategy is full annuitization of pension assets. The disparity of these results with the real- world fact that very few people purchase annuities has been dubbed the “annuity puzzle.”
The underlying premise of the annuity puzzle is that maximizing the expected discounted CRRA utility generates results that are both normative (how people should behave) and descriptive (how people do behave), and that there is therefore no explanation for the failure of millions of retirees to purchase annuities. It seemed likely to us that, in fact, discounted CRRA utility may be neither descriptive nor normative, and that individuals who do not purchase annuities may be making rational decisions but based on an objective function that is not (yet) captured by economic models. A survey seemed the best way to determine, at least, whether the annuity puzzle assumptions are descriptive.
Respondents really don’t like annuities. When given a hypothetical amount of money available to them at their hypothetical retirement, 84 percent would not pay even half of market price for a life annuity, and most wouldn’t buy one at any price. The reasons given included fear of default of the annuity provider (respondents were unaware that annuity income from Canadian insurers is protected in the event of default) and loss of financial security—that is, for the respondents, there is more security in having the assets available instantly than in having them converted to an income stream. Several respondents referred to annuities as a gamble, and some as a “scam.”
I was also surprised that so many respondents were willing to choose the risky retirement income stream over the steady one. I expected people to be more concerned about the possibility of low income, but there was a distinct attraction for many respondents to the cases where one or two paths looked really, really good, even where the other paths looked really bad.
Interesting post, thanks for posting. Yes, the "annuity puzzle" is so large that I suspect researchers should stop think everybody is clueless and figure out why uptake is so low.

I do think researchers underestimate the value of having assets available in a lump sum. To get a moderately large monthly income payment -- one which isn't even adjusted for inflation -- you have to write a pretty big check. As in six figures, or probably several multiples of six figures. That money is gone forever. People care about that, if for no other reason than they know of situations where people had large unexpected expenses. Also, I think whether people say they want a legacy or not, as they get older, they think "it would be nice if X got some money when I'm gone."

And finally, if a decent chunk of your income already comes from a stable funding source like SS in the US, which is an extremely common situation, well, the pain of writing a big check now to ensure that you'll have a (eroded by inflation) chunk of income later is less appealing.

I do think people without much SS should look really really hard at things like SPIAs.
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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by dbr »

Isn't it also conventional financial wisdom not to annuitize everything. I may be imagining it but I had the idea companies were not even supposed to sell an annuity leaving an investor with less than half his original liquid assets. I don't know where I got that.

In any case, as pointed out above, Social Security and pensions are annuities. Even though pensions are far gone compared to a period in time, traditionally retirees are largely annuitized even without actually buying an annuity. In fact I know people who have zero net worth and no assets who are getting along just fine on pensions, Social Security, and in some cases public assistance, which also functions as an annuity,
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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by catdoctor »

Stinky wrote: Sat Jun 12, 2021 9:00 am for those who have access to it.
How does one gain access?
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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by Dottie57 »

grok87 wrote: Sat Jun 12, 2021 7:21 am
Northern Flicker wrote: Fri Jun 11, 2021 7:54 pm
Horton wrote: Fri Jun 11, 2021 6:53 pm
Northern Flicker wrote: Fri Jun 11, 2021 3:54 pm I would expect stable value funds to have similar properties.
My stable value option currently yields about half TIAA Traditional, so I’d rather the TDF in my 401k use a bond fund.

(I’m basing this on my FIL’s minimum yield of 3% in TIAA Traditional.)
Well sure, a product needs to have a competitive yield/return to be effective. The white paper also discusses lifetime income annuities, which can be purchased in an IRA or taxable account. MYGA's and are another type of fixed annuity. Annuitizing some of one's fixed income assets with a SPIA may improve portfolio efficiency for a retiree.
the trouble is the pricing. still waiting to see insitutional pricing for immediate income inflation-indexed annuities offered as in-plan options in 401k plans
It would be great to have the option for an SPIA within a 401k.
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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by tibbitts »

Horton wrote: Sat Jun 12, 2021 8:51 am To answer your question on fixed annuities, show me a stable value option or MYGA (from a company with a similar credit rating as TIAA) yielding anything close to TIAA traditional.
Although I appreciate my TIAA access, this is a little like saying "show me anything similar to my TSP plan", although enthusiasm for the G-fund has wilted a bit - just like enthusiasm for Traditional with a 1% guarantee (or really anything less that 3%) has cut into the fan base. I have a similarly high-rated (or close enough for me) annuity that even during accumulation was locked in at a minimum 4%, but it's not something I could duplicate today, so I don't expect anybody to show me something similar. Same for the 3%-plus fixed rate on some of my I-bonds.
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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by Garco »

For more than 40 years I've been a TIAA participant, employed by an institution that has TIAA for its main 403b retirement plan. I contributed to TIAA's "Traditional" annuity fund for most of those years, until I retired and went off the institution's payroll. My contributions to the TIAA plan were mandated -- 5% came off the top of my salary, 10% were "contributed" by my employer. (Other plans were also available at different times, e.g., from Fidelity.) Cumulatively, this roughly 15% monthly contribution really added up.

But when I reached retirement I decided not to annuitize. Instead I'm taking the combined sum in my "Traditional" accumulation and taking a "Transfer Payout Annuity," which over a period of 9 years and 1 day puts the distribution into other investments within my TIAA plan. In effect, I'm giving up the guaranteed lifetime annuity -- but not the cash that was accumulated in the TIAA Traditional subaccount -- and redeploying the accumulated cash into other investments.

I chose to do this because I was concerned about the complications of the payouts after I retired and expired. It was easier for me to imagine directly distributing my invested holdings and savings to my successors, none of whom are familiar with TIAA or annuities but who do have accumulated savings and retirement plans of their own from other non-TIAA providers. Don't get me wrong. I know some TIAA annuitants who are quite happy with their TIAA annuity payouts. But this didn't appear to be the best way for me to hand off my accumulation to my other family members. And there's a size factor as well: I accumulated a lot of money in TIAA, more than I could ever use. And then, in my 60's, I had received some family money as well, almost in my last working year.
Last edited by Garco on Sat Jun 12, 2021 5:26 pm, edited 3 times in total.
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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by tibbitts »

catdoctor wrote: Sat Jun 12, 2021 9:47 am
Stinky wrote: Sat Jun 12, 2021 9:00 am for those who have access to it.
How does one gain access?
It's a separate question as to how to gain access to TIAA Traditional and how to gain access to a guaranteed minimum 3% unrestricted TIAA Traditional, which is probably what people are thinking about.
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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by JohnDoh »

dbr wrote: Sat Jun 12, 2021 9:44 am Isn't it also conventional financial wisdom not to annuitize everything. I may be imagining it but I had the idea companies were not even supposed to sell an annuity leaving an investor with less than half his original liquid assets. I don't know where I got that.

In any case, as pointed out above, Social Security and pensions are annuities. Even though pensions are far gone compared to a period in time, traditionally retirees are largely annuitized even without actually buying an annuity. In fact I know people who have zero net worth and no assets who are getting along just fine on pensions, Social Security, and in some cases public assistance, which also functions as an annuity,
On the question of who should annuitize, see Jim Otar's "Zone Strategy" as one comprehensive answer. It's available as part of his magnus opus UNVEILING THE RETIREMENT MYTH (Chapter 41) and as a standalone article (see Toons's link in this thread viewtopic.php?t=144663). There also numerous threads on BH about Otar as well as articles in the WWW wilds.
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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by tibbitts »

Garco wrote: Sat Jun 12, 2021 10:24 am I know some TIAA annuitants who are quite happy with their TIAA annuity payouts. But this didn't appear to be the best way for me to hand off my accumulation to my other family members.
It's a terrible way if you choose a single-life option for sure, but definitely simple. I'm guessing that most people who annuitize aren't thinking about passing down that money as a priority. But if you don't annuitize, I'm not sure TIAA is that much worse in complexity than other investments, not even in the restricted flavor, although it may have some additional built-in options.

When I retired I actually took money out of my IRA at Vanguard (bond funds specifically) and put it into TIAA unrestricted at 3%. But that's really a separate decision from annuitizing (maybe, eventually.)
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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by dbr »

JohnDoh wrote: Sat Jun 12, 2021 10:34 am
dbr wrote: Sat Jun 12, 2021 9:44 am Isn't it also conventional financial wisdom not to annuitize everything. I may be imagining it but I had the idea companies were not even supposed to sell an annuity leaving an investor with less than half his original liquid assets. I don't know where I got that.

In any case, as pointed out above, Social Security and pensions are annuities. Even though pensions are far gone compared to a period in time, traditionally retirees are largely annuitized even without actually buying an annuity. In fact I know people who have zero net worth and no assets who are getting along just fine on pensions, Social Security, and in some cases public assistance, which also functions as an annuity,
On the question of who should annuitize, see Jim Otar's "Zone Strategy" as one comprehensive answer. It's available as part of his magnus opus UNVEILING THE RETIREMENT MYTH (Chapter 41) and as a standalone article (see Toons's link in this thread viewtopic.php?t=144663). There also numerous threads on BH about Otar as well as articles in the WWW wilds.
Good reminder. Otar is the only reference I recall where the issue is explicitly discussed. In fact that book is one of the few specifically written on how to finance retirement. Pfau's paper on stocks plus annuities vs stocks plus bonds is one of the few other in that vein.
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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by Ron »

dbr wrote: Sat Jun 12, 2021 9:44 am Isn't it also conventional financial wisdom not to annuitize everything. I may be imagining it but I had the idea companies were not even supposed to sell an annuity leaving an investor with less than half his original liquid assets. I don't know where I got that.
You may have remembered that from one of my various postings outlining what I did fourteen years ago when I purchased my/our SPIA.

At the time, the application to the company I purchased my SPIA from (via FIDO) required that the funds for the purchase did not represent more than 50% of the total retirement assets that I/wife held at the time.

- Ron
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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by TN_Boy »

dbr wrote: Sat Jun 12, 2021 9:44 am Isn't it also conventional financial wisdom not to annuitize everything. I may be imagining it but I had the idea companies were not even supposed to sell an annuity leaving an investor with less than half his original liquid assets. I don't know where I got that.

In any case, as pointed out above, Social Security and pensions are annuities. Even though pensions are far gone compared to a period in time, traditionally retirees are largely annuitized even without actually buying an annuity. In fact I know people who have zero net worth and no assets who are getting along just fine on pensions, Social Security, and in some cases public assistance, which also functions as an annuity,
Sometimes the researchers say odd things. Here is a quote from that paper and my response from the paper "Milevsky and Huang - Spending Retirement on Planet Vulcan" from this recent thread: viewtopic.php?f=10&t=349648. The paper is not solely about annuities, but it is pointing out their value.
The optimal trajectory of financial capital also declines with age. Moreover, for retirees with pre-existing pension income, spending down wealth by some advanced age, and thereafter living exclu-sively on pension income, is rational. The WDT can be at age 90—or even 80 if the pension income is sufficiently large. Greater (longevity) risk aver-sion, which is associated with lower consumption, induces greater financial capital at all ages. Planning to deplete wealth by some advanced age is neither wrong nor irrational.
[And I said]

Anyone who has seen a person in late life burn through well into six figures of medical expenses in a year or less knows that you don't want all your money to be coming from an income stream. You want some resources left over. You'd think a Vulcan would understand that.

An upper-middle income person would be totally irrational to deplete their wealth by an advanced age, even if they had a pretty good pension. Someone with lesser means might do this, relying upon medicaid or family resources for things like LTC if needed.
So yeah, there is a mindset that living solely off pension/annuity income late in life is okay due to spending down non-pension assets and I think that's a breathtakingly stupid idea if you can afford to prevent it. I will note that lots of people don't have huge sums of money saved and thus wind up living largely off SS with only modest savings.

Annuities are good. When needed.
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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by dbr »

Ron wrote: Sat Jun 12, 2021 10:54 am
dbr wrote: Sat Jun 12, 2021 9:44 am Isn't it also conventional financial wisdom not to annuitize everything. I may be imagining it but I had the idea companies were not even supposed to sell an annuity leaving an investor with less than half his original liquid assets. I don't know where I got that.
You may have remembered that from one of my various postings outlining what I did fourteen years ago when I purchased my/our SPIA.

At the time, the application to the company I purchased my SPIA from (via FIDO) required that the funds for the purchase did not represent more than 50% of the total retirement assets that I/wife held at the time.

- Ron
Thanks So there is a data point. I wonder if this is not basically a suitability requirement to prevent insurance companies from taking advantage of the customer. It would prevent someone from deciding to fund retirement by taking everything and buying an SPIA, but we are reading people don't do that anyway,
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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by Rex66 »

It is suitability but bc if u had a major expense such as medical, you would have difficulty since you no longer have extra funds
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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by ResearchMed »

Horton wrote: Sat Jun 12, 2021 9:04 am Here’s one of my favorite articles on annuities (see page 18):

https://www.soa.org/globalassets/assets ... -iss97.pdf

Some excerpts:
As we developed that study, we became increasingly disillusioned with the standard academic approach to annuitization, in which an optimal strategy is determined by maximizing the expected discounted utility, typically assuming a constant relative risk aversion (CRRA) utility function. In almost every case, across hundreds of published academic papers, the result of this exercise indicates that the optimal strategy is full annuitization of pension assets. The disparity of these results with the real- world fact that very few people purchase annuities has been dubbed the “annuity puzzle.”
The underlying premise of the annuity puzzle is that maximizing the expected discounted CRRA utility generates results that are both normative (how people should behave) and descriptive (how people do behave), and that there is therefore no explanation for the failure of millions of retirees to purchase annuities. It seemed likely to us that, in fact, discounted CRRA utility may be neither descriptive nor normative, and that individuals who do not purchase annuities may be making rational decisions but based on an objective function that is not (yet) captured by economic models. A survey seemed the best way to determine, at least, whether the annuity puzzle assumptions are descriptive.
Respondents really don’t like annuities. When given a hypothetical amount of money available to them at their hypothetical retirement, 84 percent would not pay even half of market price for a life annuity, and most wouldn’t buy one at any price. The reasons given included fear of default of the annuity provider (respondents were unaware that annuity income from Canadian insurers is protected in the event of default) and loss of financial security—that is, for the respondents, there is more security in having the assets available instantly than in having them converted to an income stream. Several respondents referred to annuities as a gamble, and some as a “scam.”
I was also surprised that so many respondents were willing to choose the risky retirement income stream over the steady one. I expected people to be more concerned about the possibility of low income, but there was a distinct attraction for many respondents to the cases where one or two paths looked really, really good, even where the other paths looked really bad.
I was startled by this quote of yours above:

"...In almost every case, across hundreds of published academic papers, the result of this exercise indicates that the optimal strategy is full annuitization of pension assets...."
[emphasis added]

I'm not sure what exercises are being used, but just about everything I've read about annuitizing suggests NOT "annuitizing everything".

However, I don't understand the (in my mind) extreme aversion to life annuities/SPIAs, but I think at least some of it is due to confusion about the meaning of "annuity".

And that confusion isn't all that uncommon here on BH, where many members are relatively financially knowledgeable.
Indeed, I was very confused at first, albeit not about annuities in general. What I found confusing was the existence/concept of "non-annuitized annuities", which sounded to me about as much an oxynoron as anything could be. :annoyed
So "an annuity" could be a life income stream or it could be a type of mutual fund, bought and sold like other mutual funds? Or it could be some type of relatively illiquid investment with huge fees? Or... something else?

I think that more frequently the confusion is about *types* of annuities. To be sure, there are types with very high fees, limited financial advantages/possible gains even not counting those overall fees, and that are relatively illiquid, etc.

Those "annuity sales reps" are not likely to want to point out the "better" SPIA types, the ones that do not get them those great commissions...

But some of the "annuity puzzle" is no doubt accounted for by those with serious bequest plans. Many of these people may well prefer to live on less, including much less, so that heirs can have more. (That sentiment is evident occasionally here on BH as well. And that's not really a "puzzle".)

One needn't annuitize all of one's portfolio, even with a "good annuity" such as an SPIA. I really don't renember reading where the "best" strategy, overall, is to do just that. (But perhaps I just didn't bother to remember those comments?)

RM
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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by dbr »

For sure the conversation is confused by first of all the partial truism that "all annuities are bad" followed by the consideration of which one's are not bad followed by the consideration of which of the one's that are not bad are actually a good idea and when. Also pensions and Social Security are not annuities but function the same way as annuities to finance retirement spending. One "annuity" that is widely supported here is the "purchase" of higher Social Security benefits by delaying SS. Another distinction is the difference between arranging a guaranteed fixed income stream such as a TIPS ladder and buying an annuity that pools longevity risk over a population of annuitants.

Incidentally the full IRS title of a 403 plan is "403(b) Tax-Sheltered Annuity Plan" but it is not an annuity. On the other hand a 401k plan is a "qualified profit sharing plan." So go figure.
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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by JohnDoh »

ResearchMed wrote: Sat Jun 12, 2021 11:17 am
Horton wrote: Sat Jun 12, 2021 9:04 am Here’s one of my favorite articles on annuities (see page 18):

https://www.soa.org/globalassets/assets ... -iss97.pdf

Some excerpts:
As we developed that study, we became increasingly disillusioned with the standard academic approach to annuitization, in which an optimal strategy is determined by maximizing the expected discounted utility, typically assuming a constant relative risk aversion (CRRA) utility function. In almost every case, across hundreds of published academic papers, the result of this exercise indicates that the optimal strategy is full annuitization of pension assets. The disparity of these results with the real- world fact that very few people purchase annuities has been dubbed the “annuity puzzle.”
The underlying premise of the annuity puzzle is that maximizing the expected discounted CRRA utility generates results that are both normative (how people should behave) and descriptive (how people do behave), and that there is therefore no explanation for the failure of millions of retirees to purchase annuities. It seemed likely to us that, in fact, discounted CRRA utility may be neither descriptive nor normative, and that individuals who do not purchase annuities may be making rational decisions but based on an objective function that is not (yet) captured by economic models. A survey seemed the best way to determine, at least, whether the annuity puzzle assumptions are descriptive.
Respondents really don’t like annuities. When given a hypothetical amount of money available to them at their hypothetical retirement, 84 percent would not pay even half of market price for a life annuity, and most wouldn’t buy one at any price. The reasons given included fear of default of the annuity provider (respondents were unaware that annuity income from Canadian insurers is protected in the event of default) and loss of financial security—that is, for the respondents, there is more security in having the assets available instantly than in having them converted to an income stream. Several respondents referred to annuities as a gamble, and some as a “scam.”
I was also surprised that so many respondents were willing to choose the risky retirement income stream over the steady one. I expected people to be more concerned about the possibility of low income, but there was a distinct attraction for many respondents to the cases where one or two paths looked really, really good, even where the other paths looked really bad.
I was startled by this quote of yours above:

"...In almost every case, across hundreds of published academic papers, the result of this exercise indicates that the optimal strategy is full annuitization of pension assets...."
[emphasis added]

I'm not sure what exercises are being used, but just about everything I've read about annuitizing suggests NOT "annuitizing everything".
Per Otar, cited upthread, it's really all about the gap (if any) between one's "Annual Withdrawal Rate" (AWR) and one's "Safe Withdrawal Rate" (SWR). Otar characterize 3 zones:

RED - folks who just don't have enough savings relative to their needs to live safely off their portfolio
GREEN - folks who have so much relative to their needs that they can comfortably live safely off their portfolio
GREY - folks in the middle

I don't know about the studies you've read, but I think we can agree that the vast bulk of Americans fall into the RED zone. Many Bogleheads OTOH clearly fall into the GREEN zone and the rest probably fall into the GREY zone. (I doubt we have many red-zoners here.)

RED zoners need to annuitize everything (and then some!)
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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by Northern Flicker »

Dottie57 wrote: Sat Jun 12, 2021 10:06 am
grok87 wrote: Sat Jun 12, 2021 7:21 am
Northern Flicker wrote: Fri Jun 11, 2021 7:54 pm
Horton wrote: Fri Jun 11, 2021 6:53 pm
Northern Flicker wrote: Fri Jun 11, 2021 3:54 pm I would expect stable value funds to have similar properties.
My stable value option currently yields about half TIAA Traditional, so I’d rather the TDF in my 401k use a bond fund.

(I’m basing this on my FIL’s minimum yield of 3% in TIAA Traditional.)
Well sure, a product needs to have a competitive yield/return to be effective. The white paper also discusses lifetime income annuities, which can be purchased in an IRA or taxable account. MYGA's and are another type of fixed annuity. Annuitizing some of one's fixed income assets with a SPIA may improve portfolio efficiency for a retiree.
the trouble is the pricing. still waiting to see insitutional pricing for immediate income inflation-indexed annuities offered as in-plan options in 401k plans
It would be great to have the option for an SPIA within a 401k.
You can roll 401K funds to an IRA and hold a SPIA in an IRA.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by 22twain »

catdoctor wrote: Sat Jun 12, 2021 9:47 am
Stinky wrote: Sat Jun 12, 2021 9:00 am for those who have access to it.
How does one gain access?
You have to work at an institution that offers a 403(b) plan run by TIAA, and that plan has to offer one of the "old" versions of TIAA Traditional that have a 3% minimum rate (or even a bit higher).

As interest rates dropped during the past couple of decades, it obviously became more difficult for TIAA to support that 3% minimum rate, so at some point they started to offer new versions of TIAA Traditional with only a 1% minimum rate. They've been renegotiating agreements with institutions so as to replace the old versions with the new ones, at least for new employees or contributions.

My former employer still had the old versions of TIAA Traditional when I retired four years ago, and about 25% of my total portfolio is in them. As far as I know, they still have those versions. It's a small college (about 1200 students), so they're probably not high on TIAA's priority list for renegotiation. If they do switch to the new versions at some point, I suspect that participants would be able to keep their accumulations in the old versions, with no further contributions allowed. New contributions would have to go to the new versions.
It's "Roth", not "ROTH". Senator William Roth was a person, not an acronym.
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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by grok87 »

Dottie57 wrote: Sat Jun 12, 2021 10:06 am
grok87 wrote: Sat Jun 12, 2021 7:21 am
Northern Flicker wrote: Fri Jun 11, 2021 7:54 pm
Horton wrote: Fri Jun 11, 2021 6:53 pm
Northern Flicker wrote: Fri Jun 11, 2021 3:54 pm I would expect stable value funds to have similar properties.
My stable value option currently yields about half TIAA Traditional, so I’d rather the TDF in my 401k use a bond fund.

(I’m basing this on my FIL’s minimum yield of 3% in TIAA Traditional.)
Well sure, a product needs to have a competitive yield/return to be effective. The white paper also discusses lifetime income annuities, which can be purchased in an IRA or taxable account. MYGA's and are another type of fixed annuity. Annuitizing some of one's fixed income assets with a SPIA may improve portfolio efficiency for a retiree.
the trouble is the pricing. still waiting to see insitutional pricing for immediate income inflation-indexed annuities offered as in-plan options in 401k plans
It would be great to have the option for an SPIA within a 401k.
i would love to start harassing my 401k plan managers about this. but my plan is not that large and the reality is none of the leading 401k plans for the megacorps have done this yet.
RIP Mr. Bogle.
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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by tibbitts »

22twain wrote: Sat Jun 12, 2021 4:39 pm If they do switch to the new versions at some point, I suspect that participants would be able to keep their accumulations in the old versions, with no further contributions allowed. New contributions would have to go to the new versions.
That worked for IRAs, sort of (limited grandfathering), but I'm not so sure it would with employer retirement plans. Maybe somebody has experienced this and can comment.
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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by ResearchMed »

tibbitts wrote: Sat Jun 12, 2021 6:01 pm
22twain wrote: Sat Jun 12, 2021 4:39 pm If they do switch to the new versions at some point, I suspect that participants would be able to keep their accumulations in the old versions, with no further contributions allowed. New contributions would have to go to the new versions.
That worked for IRAs, sort of (limited grandfathering), but I'm not so sure it would with employer retirement plans. Maybe somebody has experienced this and can comment.
Some of what was formerly called TIAA-CREF, now just TIAA, were offerings that were contractually with the investor, not the institution, such as at least some of the "CREF" funds. Those apparently could not be altered by any change in the institutional contractual relationship.

We learned this when our 403b [temporarily, as it turned out] switched away from TiAA. At that time, the CREF funds, TREA, and Trad Ann remained "as they were" for the individual, but other holdings, such as TiAA Equity Fund, were moved to another vendor and then "mapped into" a different but similar (and non-TIAA) mutual fund, such as Vanguard's Total Stock Market fund.
If *we* had removed money from those protected funds, we would not have been able to put money back in at that point.

Interestingly, several years later, our 403b plan moved *back* to TIAA, and some reverse mapping occurred. But this time, there was a Brokerage Window in the TIAA 403b, so a variety of "other funds" could stay intact or be added.

In our plan's case, we retained the 3% for the EmployER-contributed Trad Ann and also for the Trad Ann for any EmployEE-contributed money.
We feel very fortunate about that, these days.

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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by Horton »

grok87 wrote: Sat Jun 12, 2021 5:44 pm i would love to start harassing my 401k plan managers about this. but my plan is not that large and the reality is none of the leading 401k plans for the megacorps have done this yet.
Immediate income inflation-indexed annuities do not currently exist, so I wouldn’t recommend harassing your 401k plan sponsor. Instead, you should start harassing insurers to offer them. There was one insurer that offered them up until a couple years ago. They discontinued them because no one bought them. :P
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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by Northern Flicker »

Nobody bought them towards the end because over time they became too expensive.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by Northern Flicker »

TIAA is not the only company that offers a fixed annuity. And some stable value funds are very competitive.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by tibbitts »

Northern Flicker wrote: Sat Jun 12, 2021 9:43 pm TIAA is not the only company that offers a fixed annuity. And some stable value funds are very competitive.
Indeed until recent years, my employer's stable value fund was outperforming my 3% unrestricted traditional. Until it didn't. I should have been more focused on the guarantee, just like I should have been in the days of 12-year-doubling EEs and 3+% I-bonds. Of course there are still some stable value funds, like the NYC fund with the 7% minimum guarantee, that are still outperforming any flavor of Traditional.
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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by Northern Flicker »

Stinky wrote: Sat Jun 12, 2021 5:41 am
Northern Flicker wrote: Fri Jun 11, 2021 3:54 pm The following TIAA white paper quantifies potential benefits of including fixed annuities and lifetime income products in retirement portfolios. I would expect stable value funds to have similar properties. (Caveat: TIAA is of course not an unbiased disinterested party with this).

https://www.tiaa.org/public/pdf/insight ... ced-td.pdf
Thanks for posting the link.

I've never studied TIAA annuities, since my workplace plan weren't from TIAA and I'm not a TIAA policyholder. However, I know from reputation that TIAA is an excellent company, delivering great value to its policyholders.

That being said, I wonder whether the conclusions that the paper reaches are generally applicable to fixed annuities issued by other companies. Or, ?are the conclusions specific to TIAA, because of its superior products?

Does anyone have an opinion?
I don't see why the applicability of the analysis would be limited to TIAA products.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by Northern Flicker »

tibbits wrote: I'm guessing that most people who annuitize aren't thinking about passing down that money as a priority.
Not necessarily. Annuitizing some fixed income assets increases the sustainable withdrawal rate supported by fixed income assets, so you need less of a fixed income allocation, allowing for a somewhat larger equity allocation.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by NiceUnparticularMan »

Just a couple random thoughts:

I agree SPIAs could often play a beneficial role for people who would really benefit from having the ability to extract a higher regular withdrawal rate "safely" (in light of longevity risk). And I am not particularly concerned about the real world behavior on this issue because I see no reason to believe many people are properly informed on this issue. Of course planning for unexpected spending and heirs is all potentially important too, but with the decline of pensions, using SPIAs to help supplement Social Security in creating an income "floor" that is largely immune to longevity risk is appealing (although obviously it would be more appealing if they were inflation adjusted, but that's a whole other issue).

We use a stable value fund rather than bonds for risk-management purposes, but we then put less in the stable value fund than we would put in bonds. We plan to use the TSP G Fund in a similar way in retirement. I personally think focusing just on the returns aspect is not a good idea as it is overlooking what distinguishes stable value funds from bond funds (namely lack of interest rate risk despite returns farther out on the yield curve than money market funds), and how that difference might be beneficial in managing certain risks.

Of course when the yield curve is relatively flat AND it turns out you have no need for such risk management, then stable value funds will be a "drag" on your portfolio. But then if the yield curve steepens, the point of these funds is they will track those returns upward without losing value. Which will be nice if it happens. And even if not, if you have been using the fact they can do that to hold more in risky assets, then you will get your compensation for using stable value funds in that way.
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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by seajay »

gjlynch17 wrote: Sat Jun 12, 2021 7:10 amI believe the conclusions (at least with respect to SPIAs) are applicable to other annuities. Wade Pfau had a fairly comprehensive paper in 2012 that concluded that the "efficient frontier" for a retiree consisted of stocks and SPIAs (no bonds)

https://papers.ssrn.com/sol3/papers.cfm ... id=2151259
SPIA's forego access to the ongoing/remaining capital value in return for collective/pooled longevity cover. In some situations having access to capital may prove desirable, for instance doc telling you that you only have a year of life remaining at perhaps age 70. I opine that 50/50 of both actual SPIA and a DIY SPIA (liability matched inflation bond drawdown) is the better diversified choice. For me personally in having both a occupational inflation linked pension that will be further supplemented by a state pension in 6 years time - they provide enough 'SPIA' holdings already and as such supplementing that with my own DIY SPIA (bonds) is the better path for me and my heirs. Stocks/bonds/pensions. For others without pensions then stocks/bonds/SPIA's could be a choice, but where just stocks/bonds alone could equally serve well, bonds for drawdown, stocks for growth that might cover longevity.
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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by student »

At least one reply above mentioned that TIAA wants to convince institutions to move away from the 3% guarantee product. It is true. In current interest rate environment it is tough for TIAA to maintain it. For whatever reasons, our university decided to hire a consultant to review our 403B offerings and they agreed to let TIAA switch us from the 3% guarantee to something lower. I was not happy and I confronted the consultant at the meeting.
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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by seajay »

Northern Flicker wrote: Sun Jun 13, 2021 12:39 am
tibbits wrote: I'm guessing that most people who annuitize aren't thinking about passing down that money as a priority.
Not necessarily. Annuitizing some fixed income assets increases the sustainable withdrawal rate supported by fixed income assets, so you need less of a fixed income allocation, allowing for a somewhat larger equity allocation.
If you convert (swap out) bond holdings into a annuity holding then yes as a percentage you may hold more equity exposure, be in the "I'm 100% stock in retirement" camp. Broadly no difference, $1M in a stock/bond portfolio versus $600K stock and having spent $400 to buy a annuity. Consider however rather than buying a annuity you roll-your-own, where you retain access to the capital. Maybe a stock/bond blend with a 3% SWR that historically had good prospect of surviving 30 years. +3% real, in contrast to recent negative real yields for the inflation bonds that annuities might invest in to liability match payouts. On that measure less needs to be allocated to your stock/bond DIY 3% inflation adjusted annuity than what would be needed to buy a annuity investing in negative real yield holdings, such that more $$$ capital would be available to be invested in your growth/stock bucket. And where upon passing any residual value in the DIY annuity remained available to your heirs.
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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by ResearchMed »

student wrote: Sun Jun 13, 2021 6:01 am At least one reply above mentioned that TIAA wants to convince institutions to move away from the 3% guarantee product. It is true. In current interest rate environment it is tough for TIAA to maintain it. For whatever reasons, our university decided to hire a consultant to review our 403B offerings and they agreed to let TIAA switch us from the 3% guarantee to something lower. I was not happy and I confronted the consultant at the meeting.
Can you determine what your employer (and employees!) "got" in return for giving up that 3% guarantee?
Was that for both EmployER- and EmployEE-contributed money?

Also, I assume that's now a 1% guarantee (even if it is temporarily above 1%, and if so, what is it currently)?

Is there anything in terms of the TIAA "guarantee" that is between 1% and 3% for employer/403b plans?

RM
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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by Wrench »

tibbitts wrote: Sat Jun 12, 2021 6:01 pm
22twain wrote: Sat Jun 12, 2021 4:39 pm If they do switch to the new versions at some point, I suspect that participants would be able to keep their accumulations in the old versions, with no further contributions allowed. New contributions would have to go to the new versions.
That worked for IRAs, sort of (limited grandfathering), but I'm not so sure it would with employer retirement plans. Maybe somebody has experienced this and can comment.
I have an old 403B plan that has a stable value fund that pays 4%. They just modified the 403B to eliminate that fund (among other changes). The old plan is still in place for existing participants, but just not accepting new contributions. So, I was able to keep the prior fund, and not only that, I was able to transfer additional money into it prior to the conversion date. I believe this is standard practice - after all the old plan IS a contract and as such, cannot be unilaterally changed by one party alone (but I am NOT a lawyer, this is just my understanding...).

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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by Wrench »

Horton wrote: Sat Jun 12, 2021 8:08 pm
grok87 wrote: Sat Jun 12, 2021 5:44 pm i would love to start harassing my 401k plan managers about this. but my plan is not that large and the reality is none of the leading 401k plans for the megacorps have done this yet.
Immediate income inflation-indexed annuities do not currently exist, so I wouldn’t recommend harassing your 401k plan sponsor. Instead, you should start harassing insurers to offer them. There was one insurer that offered them up until a couple years ago. They discontinued them because no one bought them. :P
My guess is that if a megacorp with many 10s or 100s of thousands of employees went to an insurance carrier and said, we want to offer this in our 401K, will you do it? The answer would be "yes", and there would have multiple carriers willing to so so because the demand would be "built in", and they could charge the fees required to cover their overhead.

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Re: TIAA White Paper on Fixed Annuities and SPIAs in Retirement Portfolios

Post by gjlynch17 »

I thought it would be interesting to quantify the premium of the liquidity and mortality credits (and marginal credit risk) of a SPIA compared to a traditional fixed income portfolio. I have a customized ABW/NPV spreadsheet that estimates withdrawals to age 100. I start with an age of a person at age 53 with a 60%/40% equity/fixed income portfolio. For expected returns, on equities, I use an average of estimated 10-year returns from Vanguard, BlackRock, Research Affiliates, JP Morgan, AQR, Northern Trust and the equity premium from Professor Aswatch Damodaran of NYU. For expected returns on fixed income, I compared the current 2.15% yield on a 30-year treasury with the implied 3.4% "yield" from a Guardian Insurance SPIA with a 100% joint survivor for a spouse age 53 until age 100 as quoted from BluePrint Income. Guardian has a AA+ credit rating and a Comdex rating of 98. Combined with a state guaranty, there is some marginal credit risk but the Guardian SPIA is much closer to Treasury than a long-term corporate bond fund.

The results are as follows. The withdrawal rate for the portfolio with a 30-year treasury is 3.47%. The withdrawal rate for a portfolio with the Guardian SPIA is 3.79%. The difference for the mortality credits and liquidity premium was approximately 8.7%. One could increase this premium by purchasing more mortality credits through a DIA.

For me, the SPIA premium is not sufficiently large to purchase one but I found the analysis helpful and as I get older and market environment changes, the conclusions may differ.
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