Do CPI-Indexed Single-Premium Deferred Annuities exist?

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555
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Do CPI-Indexed Single-Premium Deferred Annuities exist?

Post by 555 »

Do CPI-Indexed Single-Premium Deferred Annuities exist?

I know that non-CPI-Indexed ones do. For example I went to immediateannuities.com and got a quote that shows that a 60 year old male could pay a single $120k premium now in 2015, and then starting in 20 years time, in 2035 at age 80, they start getting monthly payments of $3,407 (nominal) for the rest of their life. (They get nothing if they don't survive the first 20 years.)

The question is, can you get a CPI-Indexed version of this, so the quote would say the first monthly payment is some $X in 2015 dollars, which is then CPI-Indexed up to say 2035 dollars, and also continues to be CPI-Indexed after that. (Obviously if both quotes were actuarially fair, then $X would be much less than $3,407, and would still usually be somewhat less when translated to 2035 dollars, but the CPI-Indexed payments would usually increase and overtake the nominal payments in later years.)

Such annuities have an obvious retirement planning use that would appeal to some. If you retire at age 60, and get an annuity that starts at age 80, then you can budget your portfolio for a fixed 20 year period, and then the annuity kicks in (i.e. we're talking about the usual longevity insurance). Of course you take the risk that you don't last the first 20 years, and lose the premium, but if you make it, you benefit from the mortality credits, i.e. the survivors benefit from the non-survivors' premiums, as you'd expect.

But comparing the nominal and real ones (and we don't know the real ones even exist yet), the trouble with the nominal one is that $3,407 per month for a $120k premium (34.07% Cashflow Rate)*** may sound great, but who knows what $3,407 will buy after 20 years of future unknown inflation. I can't see how you could fully rely on this to fund your later years (you could put a little money into one as part of a diverse retirement plan) since a future nominal income stream just isn't a truly safe spending-needs "floor". That's why a CPI-Indexed version would be much more useful for retirement planning.

So does anyone know if CPI-Indexed Single-Premium Deferred Annuities actually exist right now, or if they are likely to in the future? Would you consider using them?

In the absence of these, there are alternatives, but they are not the same. The 60 year old male could buy a nominal or real SPIA to start payments immediately, but the premiums are much higher (e.g. $700k to get monthly payments of $3,407 nominal) and you may prefer to handle your own portfolio to cover the first predictable-length 20 years. Another option is to just handle your own portfolio with the intention of covering the first 20 years, while making sure you have enough in reserve to buy an annuity at age 80 if needed, which forgoes the 20 years mortality credits, but may save the premium if either you don't last that long, or if at 80 you find you don't need to resort to any annuity.

*** I also checked that an 80 year old male could pay a single $120k premium to get an immediate nominal $1,096 monthly payment. I also saw http://www.ssa.gov/oact/STATS/table4c6.html that about 58% of 60 year old males are expected to survive 20 years, and since
3,407/1,096 is about 3.11 which is also about (1.03)^{20}/(0.58)
then the deferred annuity is earning about 3% per year during the 20 years, and the mortality credits boost payouts by a factor of about 1/(0.58) which is about 1.72.
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Re: Do CPI-Indexed Single-Premium Deferred Annuities exist?

Post by Bill M »

Sure wish they did. If anyone has pointers, I'd love to hear about it too.

Closest I've found, and bought, is one that quotes the nominal payment for first year, and then does CPI-adjustments for subsequent years. I worked backwards to figure the amount, assuming 3.5% inflation between now and start date, and compared it to the alternative of buying TIPS today and then a CPI-adjusted SPIA in the future (assuming today's rates but with adjusted ages). Purchase now came out better, but YMMV.
Last edited by Bill M on Tue Apr 07, 2015 6:27 am, edited 1 time in total.
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Re: Do CPI-Indexed Single-Premium Deferred Annuities exist?

Post by dhodson »

You are likely over estimating mortality credits since only healthy people but these things. The insurance companies know this and use tables accordingly.
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Re: Do CPI-Indexed Single-Premium Deferred Annuities exist?

Post by powermega »

I've never heard of a deferred payout annuity that is discounted with an unknown interest rate like the future CPI. There are payout annuities that have a COLA adjustment to the payout that is based on CPI-U. I generally think people are better off buying a COLA adjusting SPIA that has a known adjustment, like 3%. I also think you would be better off not having a long deferral period for the SPIA either. Better to have the annuity payouts begin "soon" after paying the premium.
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Re: Do CPI-Indexed Single-Premium Deferred Annuities exist?

Post by Gill »

powermega wrote:Better to have the annuity payouts begin "soon" after paying the premium.
Of course, the sooner the payments begin, the smaller they are.
Gill
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Re: Do CPI-Indexed Single-Premium Deferred Annuities exist?

Post by ourbrooks »

I don't think they exist and they are unlikely to exist in the future. The problem is that they appear to be an unattractive financial proposition. Deferred annuities look really good; for my $120K investment, I get a 34% annual payment. I'm paying relatively little for the insurance.

Inflation adjusted annuities cost more than non-adjusted annuities, because the insurance company needs to cover the inflation risk. The insurance company won't be able to quote the exact payout rate on the inflation adjusted annuity so what will they quote instead? Even if they quote based on estimated inflation, I'm guessing that the end result doesn't look very good from the perspective of something bought as insurance. It will be a long and hard sell to get people to understand the value of the coverage they are buying. Many people will prefer to take their chances and buy a bit more of the fixed rate annuities instead or set up a TIPS portfolio, etc.
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Do real longevity annuities exist?

Post by bobcat2 »

CPI-Indexed Single-Premium Deferred Annuities
What a mouthful :D
I assume you are referring to real longevity annuities, sometimes called real delayed annuities.

I am not aware of any true real longevity annuities having ever been offered. I believe, at least for a while when longevity annuities were first offered a few years ago, there were some longevity annuities that provided inflation protection once the annuity income kicked in, but not for the period between the purchase date and the date the income started. If such longevity annuities are being offered now you could to a certain extent get around the initial lack of inflation protection by purchasing longevity annuities in chunks over time to make up for the purchasing power lost to inflation before the income payouts begin.

Bill M has also talked about these earlier in the thread.
Bill M -
Closest I've found, and bought, is one that quotes the nominal payment for first year, and then does CPI-adjustments for subsequent years.

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Last edited by bobcat2 on Sat Apr 04, 2015 1:05 pm, edited 1 time in total.
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Re: Do CPI-Indexed Single-Premium Deferred Annuities exist?

Post by dhodson »

id want my money to grow at a rate greater than inflation prior to the payout period.

i currently plan to purchase a non inflation protected SPIA at age 80 for basic needs (assuming good health).
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Re: Do CPI-Indexed Single-Premium Deferred Annuities exist?

Post by Rysto »

If you're really worried about inflation protection, couldn't you buy a 20-year TIPS at age 60 and then buy an immediate annuity at age 80? You'd lose the mortality credits of course but at age 80 I'd imagine that you should be able to get a pretty good rate on an annuity regardless.
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Re: Do CPI-Indexed Single-Premium Deferred Annuities exist?

Post by 555 »

Lots of good comments. Thanks! It doesn't look like a CPI-Indexed Single-Premium Deferred Annuities actually exists (where the CPI-Indexing truly starts from day 1, and yes the initial quote would look much smaller than for the nominal one, by a factor of maybe 24 years inflation).

What I'd actually like to see is a TIPS Tontine. A bunch of 60 year olds buy equal shares of 20 year TIPS, and then in 20 years, the survivors split the proceeds (to spend however they wish, which could be an annuity or anything else). An insurance company could administer it for an acceptable fee, but they wouldn't have to guess inflation or survival rates.

Anyway, you make a plan with whatever options are available. More options don't hurt.

The real questions are:
(1) When can I retire?
(2) How much do I need?
(3) How much can I spend?

Annuities are a good way of taking out some of the guesswork and uncertainty. You get extra safety just by knowing they exist and when and how to use them, even if you don't actually get one.
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Re: Do CPI-Indexed Single-Premium Deferred Annuities exist?

Post by Professor Emeritus »

Deferring social security to age 70 is the closest thing you can get to what you are describing. Over 8 years you have a "premium" you pay and at age 70 you get the annuity. I am "paying" roughly $200,000 over 8 years for an inflation/cpi protected annuity of $18,000 per year at age 70. What makes it a great deal is that I also get spousal payments of 60 K (4 x 15K) from age 66-70. so the true cost is 140 k for a18 K per year annuity at 70. Of course YMMV.
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Re: Do CPI-Indexed Single-Premium Deferred Annuities exist?

Post by 555 »

Professor Emeritus wrote:Deferring social security to age 70 is the closest thing you can get to what you are describing. Over 8 years you have a "premium" you pay and at age 70 you get the annuity. I am "paying" roughly $200,000 over 8 years for an inflation/cpi protected annuity of $18,000 per year at age 70. What makes it a great deal is that I also get spousal payments of 60 K (4 x 15K) from age 66-70. so the true cost is 140 k for a18 K per year annuity at 70. Of course YMMV.
I have neither social security nor a pension, so I have no guaranteed income streams whatsoever. (So "YMMV" is absolutely right.) So I'm looking at how to fund retirement purely with assets, no income streams. That makes things "simple" I suppose.
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Re: Do CPI-Indexed Single-Premium Deferred Annuities exist?

Post by powermega »

Gill wrote:
powermega wrote:Better to have the annuity payouts begin "soon" after paying the premium.
Of course, the sooner the payments begin, the smaller they are.
Gill
My point is that if you want an income to start 20 years from now, then wait 20 years to buy a SPIA. I don't think it's a good idea to have a long deferral period for a SPIA.
Even a stopped clock is right twice a day.
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Re: Do CPI-Indexed Single-Premium Deferred Annuities exist?

Post by dhodson »

powermega wrote:
Gill wrote:
powermega wrote:Better to have the annuity payouts begin "soon" after paying the premium.
Of course, the sooner the payments begin, the smaller they are.
Gill
My point is that if you want an income to start 20 years from now, then wait 20 years to buy a SPIA. I don't think it's a good idea to have a long deferral period for a SPIA.
I agree
Just not enough mortality credits to make it worth it. Your actually likely to have a larger pot of money which will lead to larger payments if you invest appropriately and buy the SPIA later.
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Re: Do CPI-Indexed Single-Premium Deferred Annuities exist?

Post by 555 »

I should have mentioned that my question is a spinoff from this thread
"The Final Say on Spending Rules" - L. Siegel
viewtopic.php?f=10&t=162457
discussing this article
"The Final Say on Spending Rules March 31, 2015 by Laurence B. Siegel"
http://www.advisorperspectives.com/news ... ending.php
which basically discusses a method for spending down your portfolio over a fixed 20 year period, but then makes the obvious point that you could/should cover the years after that with some kind of annuity, and in particular the kind I ask about in the OP makes the most sense (theoretically), except for the little problem that they don't seem to actually exist.

Hence my question.
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Re: Do CPI-Indexed Single-Premium Deferred Annuities exist?

Post by 555 »

Continuing with this calculation:
555 wrote:... For example I went to immediateannuities.com and got a quote that shows that a 60 year old male could pay a single $120k premium now in 2015, and then starting in 20 years time, in 2035 at age 80, they start getting monthly payments of $3,407 (nominal) for the rest of their life. (They get nothing if they don't survive the first 20 years.) ...
*** I also checked that an 80 year old male could pay a single $120k premium to get an immediate nominal $1,096 monthly payment. I also saw http://www.ssa.gov/oact/STATS/table4c6.html that about 58% of 60 year old males are expected to survive 20 years, and since
3,407/1,096 is about 3.11 which is also about (1.03)^{20}/(0.58)
then the deferred annuity is earning about 3% per year during the 20 years, and the mortality credits boost payouts by a factor of about 1/(0.58) which is about 1.72.
Another way of looking at this factor 3.11 is that if you could buy a Single-Premium Deferred Annuities for $120k at age 60 that paid out a single lump sum 20 years later (to the survivors) then that lump sum should be
3.11*$120k=$373.2k nominal, in other words, your premium grows by a factor of 3.11 (if you live 20 years, otherwise you get zero).

Annualizing this
(3.11)^{1/20} is about 1.058
so you are gaining about 5.8% per year nominal (or you lose 100% if don't live 20 years). This 5.8% per year could be viewed as a combination of interest and mortality credits. (Of course the mortality credits aren't a free lunch. You are making a bet "I bet I live" that you may win or lose, but it can be a fair bet that makes sense in some cases.)

It's true that you could expect 5.8% gain per year from some mix of stocks and bonds, but that takes some additional risk, so that's not a free lunch either. I'm happy to take risk in my portfolio and have a high proportion of stocks, without being too reckless, but the way I see it you can afford to hold a higher proportion of stocks when you have annuities than when you don't.

So I personally wouldn't dismiss a Deferred Annuity out of hand, though I'd be more interested in a genuinely CPI-Indexed one, if it were fairly priced.
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Re: Do CPI-Indexed Single-Premium Deferred Annuities exist?

Post by dhodson »

I don't believe this allows you to take more equity risk. If anything less. Let's just say stocks tank, you can't access your annuity period. You are stuck.
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Re: Do CPI-Indexed Single-Premium Deferred Annuities exist?

Post by ourbrooks »

Why not buy an inflation indexed SPIA at retirement to cover your core expenses and invest/spend the rest any way you like?

A fundamental issue with withdrawal strategies like Siegel's (or any PMT based method, such as VPW) is that there's large year to year variation in the amount of your withdrawals; if your portfolio drops by 25%, your future withdrawals will drop by the same percentage. If your portfolio goes up by 25% so will your withdrawals. The only way to reduce the variability of withdrawals is to hold a less risky portfolio; if you're 90% bonds, you won't see 25% changes in your portfolio.

Having a spending floor provided by the SPIA means that you can use a PMT strategy with a high percentage of equities and still not be exposed to as much spending volatility. Your core expenses are covered by the annuity so it's a lot easier to cut back in bad years. If you survive more than the 20 years, you've got the SPIA to fall back on.
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Re: Do CPI-Indexed Single-Premium Deferred Annuities exist?

Post by 555 »

dhodson wrote:I don't believe this allows you to take more equity risk. If anything less. Let's just say stocks tank, you can't access your annuity period. You are stuck.
I suppose I was taking the view that you build a safe floor out of conservative investments and/or annuities to generate enough income for basic needs, then invest the rest however you like (e.g. stocks). Annuities are generally a cheaper way to generate a given amount of income than a "safe withdrawal rate" method with low failure risk, for life. Of course, this argument is stronger for an immediate annuity than a deferred one. For example, perhaps oversimplifying, if you retire and can cover your life spending needs by spending half your portfolio on a CPI-Indexed Single-Premium Immediate Annuity, then you can invest the rest however you like (within reason). But also the Deferred Annuity plan would be that you split retirement into a fixed length 20 year period, after which the Deferred Annuity kicks in, so you can budget your portfolio knowing it has a fixed length time period to last, and you can budget for the needed amount of conservative investments for basic needs for those fixed 20 years, then invest the rest however you like.

That said, I will probably end up doing exactly what you suggest, namely retire and live off an investment portfolio in early retirement, and go for an SPIA around age 75-80. But I will also explore the other options. If I look at http://www.ssa.gov/oact/STATS/table4c6.html and interpret "Death probability" as a kind of "Mortality interest" (i.e. 1 years worth of mortality credits), then I think mortality credits are significant.
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Re: Do CPI-Indexed Single-Premium Deferred Annuities exist?

Post by Leeraar »

ourbrooks wrote:Why not buy an inflation indexed SPIA at retirement to cover your core expenses and invest/spend the rest any way you like?
Because inflation insurance is expensive?

Why not buy a nominal SPIA at retirement to cover your core expenses plus (say) 10% and then in 7-10 years buy another nominal SPIA to account and compensate for inflation, health, spending needs, ... ?

L.
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Re: Do CPI-Indexed Single-Premium Deferred Annuities exist?

Post by 555 »

ourbrooks wrote:Why not buy an inflation indexed SPIA at retirement to cover your core expenses and invest/spend the rest any way you like?

A fundamental issue with withdrawal strategies like Siegel's (or any PMT based method, such as VPW) is that there's large year to year variation in the amount of your withdrawals; if your portfolio drops by 25%, your future withdrawals will drop by the same percentage. If your portfolio goes up by 25% so will your withdrawals. The only way to reduce the variability of withdrawals is to hold a less risky portfolio; if you're 90% bonds, you won't see 25% changes in your portfolio.

Having a spending floor provided by the SPIA means that you can use a PMT strategy with a high percentage of equities and still not be exposed to as much spending volatility. Your core expenses are covered by the annuity so it's a lot easier to cut back in bad years. If you survive more than the 20 years, you've got the SPIA to fall back on.
Yes you could buy an inflation indexed SPIA at retirement to cover your core expenses and invest/spend the rest any way you like (as coincidentally I posted 1 minute after you). What you would probably never do is buy a fixed length (e.g.20 year) annuity, because that is something you really can do yourself. (You can't self-insure for longevity, but you can give yourself your own money back, plus interest, over a fixed 20 year period.) So why not cut out the first 20 years, and get a deferred annuity, or an immediate one 20 years later? You could say, why 20 years? It is an arbitrary length, but the point is to budget for a fixed time length, then cap it off with longevity insurance.

Also their can be tax planning, ACA, FAFSA, Roth conversion, RMDs and many other reasons why you might not want a stream of income that you might wish you could shut off some years.

As for Siegel's and other's spending formulas, they are too volatile, but I'm sure they can be smoothed in various ways. I'm not to concerned about this.
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Re: Do CPI-Indexed Single-Premium Deferred Annuities exist?

Post by 555 »

Leeraar wrote:
ourbrooks wrote:Why not buy an inflation indexed SPIA at retirement to cover your core expenses and invest/spend the rest any way you like?
Because inflation insurance is expensive?
Why not buy a nominal SPIA at retirement to cover your core expenses plus (say) 10% and then in 7-10 years buy another nominal SPIA to account and compensate for inflation, health, spending needs, ... ?
It's about comparing strategies. I don't think ourbrooks is saying everyone should go out and buy an inflation indexed SPIA at retirement. It's more an argument "well if you were going to do this strategy, then you might as well do that strategy instead".
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Re: Do CPI-Indexed Single-Premium Deferred Annuities exist?

Post by dhodson »

555 wrote:
dhodson wrote:I don't believe this allows you to take more equity risk. If anything less. Let's just say stocks tank, you can't access your annuity period. You are stuck.
I suppose I was taking the view that you build a safe floor out of conservative investments and/or annuities to generate enough income for basic needs, then invest the rest however you like (e.g. stocks). Annuities are generally a cheaper way to generate a given amount of income than a "safe withdrawal rate" method with low failure risk, for life. Of course, this argument is stronger for an immediate annuity than a deferred one. For example, perhaps oversimplifying, if you retire and can cover your life spending needs by spending half your portfolio on a CPI-Indexed Single-Premium Immediate Annuity, then you can invest the rest however you like (within reason). But also the Deferred Annuity plan would be that you split retirement into a fixed length 20 year period, after which the Deferred Annuity kicks in, so you can budget your portfolio knowing it has a fixed length time period to last, and you can budget for the needed amount of conservative investments for basic needs for those fixed 20 years, then invest the rest however you like.

That said, I will probably end up doing exactly what you suggest, namely retire and live off an investment portfolio in early retirement, and go for an SPIA around age 75-80. But I will also explore the other options. If I look at http://www.ssa.gov/oact/STATS/table4c6.html and interpret "Death probability" as a kind of "Mortality interest" (i.e. 1 years worth of mortality credits), then I think mortality credits are significant.
Much stronger for an immediate id say.

I don't think these make as much sense with the longer deferred period you mentioned of 20 years. Where I see this as potentially useful is the short period. Lets just say you know you will purchase a SPIA in 5 years well then there isn't as much time for the compounding effects of the market to take hold on improving your portfolio so likely it isn't worth the risk.
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Re: Do CPI-Indexed Single-Premium Deferred Annuities exist?

Post by 555 »

dhodson wrote:I don't think these make as much sense with the longer deferred period you mentioned of 20 years. Where I see this as potentially useful is the short period. Lets just say you know you will purchase a SPIA in 5 years well then there isn't as much time for the compounding effects of the market to take hold on improving your portfolio so likely it isn't worth the risk.
Fair enough. So the viewpoint is that you don't buy an annuity until you know that you are going to want one, but if you reach that decision you can buy it now with the income stream starting at some future date. That makes sense.

You're basically taking a wait and see approach to annuities (which is also my default position but I'm exploring the alternatives) that is, see how things are going. If you get to 75 or 80 and find your portfolio has 30 years worth of living expenses, you can do without an annuity, but if it's down to 15 years worth of living expenses, you probably really need that annuity (and it's a grey area in between. But an alternative view is that it's not that bad of a mistake for the person with a large portfolio to nevertheless get an annuity (if price/payout is reasonable for their life expectancy), and in they take that viewpoint, then they could buy it many years in advance.

I realized that I didn't use enough adjectives in my title. If there were an
Actuarily-Fair CPI-Indexed Single-Premium Deferred Annuity
to buy at age 60 and start income at age 80, then I would seriously consider it.
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Re: Do CPI-Indexed Single-Premium Deferred Annuities exist?

Post by dhodson »

I'm not sure what you feel will be actuarially fair but in essence your return is based on the following:
1. Investment returns from the insurance company
2. Mortality credits

IMO, investment returns are always going to be a bad deal over the long haul since the insurance company doesn't have any magic up their sleeves, they have huge overhead, and they invest conservatively. Over a short period of time that isn't a big deal that you very likely could do better on your own. If the insurance company gets a 5% return on their investments but you could have gotten 10%/yr then in 1 year no big deal. Over 2 decades, that's a big deal and its still a considerable deal in my view if the difference is just 1%. Mortality credits seem to really go up IMO around age 80 and you can't get them on your own. Sick people just aren't purchasing these things at age 60 so while some will still die, most of these folks are likely to live longer, the insurance company knows this and has priced it into the equation so for the first 2 decades you just aren't getting a ton of mortality credits IMO but relying on the insurance company's investments. Now what you really need is to have sick people inaccurately gauge their health and buy these things in big numbers at age 60. That would be a game changer but I don't see that happening. Thus I question that the mortality credits will be high enough to offset the lower investment returns. Of course delaying also allows you to avoid other risks such as insurance company going under and you can avoid buying an inflation protected product then if desired as well. I don't plan to purchase an inflation protected one. I'll be going with a straight vanilla SPIA at age 80 (assuming good health).
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Re: Do CPI-Indexed Single-Premium Deferred Annuities exist?

Post by Watty »

Rysto wrote:If you're really worried about inflation protection, couldn't you buy a 20-year TIPS at age 60 and then buy an immediate annuity at age 80? You'd lose the mortality credits of course but at age 80 I'd imagine that you should be able to get a pretty good rate on an annuity regardless.
The TIPS would be best in a retirement account because of the way they are taxed so that might not work for everybody.

That is what I have been thinking about but with 20 year time frame a conservative balanced mutual instead of TIPS would be an an option since the odds of it under performing a TIPS bond would be pretty low.

This also has the advantage of';

1) If you are a couple then only one of you may be surviving then so you could get a larger single person annuity.

2) Interest rates might be higher higher then the current rates which are depressed by quantitative easing.
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Re: Do CPI-Indexed Single-Premium Deferred Annuities exist?

Post by 555 »

Thanks, everyone. I pretty much agree with what people are saying. I was thinking of some kind of theoretical retirement planning in an idealized world. In the real world, a lot of insurance products eat away at your assets at a rate of percent instead of basis points, so minimizing contact time with insurance products is prudent. On the other hand, retirement planning is easier if you bring some annuity products into the mix. So this thinking brings me back to the idea of waiting and seeing if you need an SPIA at age 75 or 80, as suggested by many on this forum.
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Re: Do CPI-Indexed Single-Premium Deferred Annuities exist?

Post by Leeraar »

dhodson wrote:I'm not sure what you feel will be actuarially fair but in essence your return is based on the following:
1. Investment returns from the insurance company
2. Mortality credits
0. Return of your capital

is the major part of your payment.

L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
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