Annuity -SPIA

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jcjc
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Annuity -SPIA

Post by jcjc »

We are nearing retirement less than 3 years maybe much sooner (currently age 62 and 55) and at some point would like to purchase a SPIA to cover our bare bones expenses since we have no pension only personal investments. Currently payout rates are dismal for joint life somewhere around 5% or less. Since I have been unable to find historical payout rates especially for male/female joint coverage I am wondering at what payout rate would you consider purchasing a SPIA? We will use appx. 1/4 of our investments for this purpose. We have no idea but I'm thinking of waiting for a minimum of 6% maybe more. Hoping we won't have to wait until age 70 to see rates go up. I really don't understand mortality credits I've seen mentioned here. The idea for us is to give us some peace of mind against market fluctuations. Unfortunately we don't have enough to just live off dividends and interest and SS unless we drastically changed our lifestyle.

Will probably be my first of many questions. New to this forum and happy to be here! Thank you
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Mel Lindauer
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Re: Annuity -SPIA

Post by Mel Lindauer »

jcjc wrote:We are nearing retirement less than 3 years maybe much sooner (currently age 62 and 55) and at some point would like to purchase a SPIA to cover our bare bones expenses since we have no pension only personal investments. Currently payout rates are dismal for joint life somewhere around 5% or less. Since I have been unable to find historical payout rates especially for male/female joint coverage I am wondering at what payout rate would you consider purchasing a SPIA? We will use appx. 1/4 of our investments for this purpose. We have no idea but I'm thinking of waiting for a minimum of 6% maybe more. Hoping we won't have to wait until age 70 to see rates go up. I really don't understand mortality credits I've seen mentioned here. The idea for us is to give us some peace of mind against market fluctuations. Unfortunately we don't have enough to just live off dividends and interest and SS unless we drastically changed our lifestyle.

Will probably be my first of many questions. New to this forum and happy to be here! Thank you
Several things influence the payout rate on a SPIA.

First is your age (or in your case, both ages) and the second major influence is the current interest rates. Since you're fairly young (that lowers the payout) and you're looking at a joint life (that lowers the payout even more) and current interest rates are very low (that lowers the payout), you're looking at a "perfect storm" for a low payout.

The longer you wait, the higher the payout will be because of your advanced ages. There's also the possibility of higher interest rates in place at that time.

Having said all that, if you need the guaranteed current income to live on, and you don't think your portfolio will support the withdrawal rate needed, then perhaps you just have to bite the bullet and accept the current lower SPIA payouts. The alternative would be to live off the money you're thinking of investing in the SPIA.
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magellan
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Re: Annuity -SPIA

Post by magellan »

Buying an annuity combines two distinct retirement planning steps into one action. The first is removing funds from your risky portfolio to dedicate to the job of producing a safe income stream. The second is augmenting that safe income stream with insurance so that it continues until you die. You don't need to combine these steps.

While it may make sense to dedicate funds to a safe income stream right away, buying longevity insurance protection probably doesn't make sense at such a young age. Annuities have hidden costs built in that are sort of like a mutual fund 'expense ratio'. At younger ages, these costs are higher than the value of the mortality credits you earn on the policy (the insurance benefit). At this stage, the annuity is more of an investment product and less of an insurance product. It's sort of like buying a whole life policy vs. term. You can't see the annuity costs because they're hidden in the form of credit risk. Think of it like two mutual funds with the same returns, the one with the higher expense ratio has to take on more risk to match the returns of the lower cost fund.

If you wait and buy the annuity when you're 75 or 80, the value of the annual mortality credits is very large and more than offsets the annuity's costs. This makes the annuity more like term life - mostly insurance without so much investment product. Also, at older ages the annuity payouts aren't very dependent on the level of interest rates.

While you're younger you can get the safe income stream from assets like CDs and TIPS. If you have space in tax deferred, you could sell part of your portfolio and buy a single TIPS that will mature when you're 75 or 85. This can be earmarked for the purchase of an annuity. Its value will be guaranteed the day you buy it, so you can count on the funds being there to buy the annuity. For income between now and then, depending on your exact situation, you could buy a combination of CDs and TIPS to lock down the income stream you need for the next 10-20 years.
Last edited by magellan on Mon Mar 16, 2015 7:11 am, edited 1 time in total.
Bill M
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Re: Annuity -SPIA

Post by Bill M »

Hersh Stern (immediateannuities.com) does a monthly report of annuity rates. The most recent issue of his "Comparative Annuity Report" is available at: https://www.immediateannuities.com/comp ... y-reports/ (look at right margin, at bottom of page for historical issues).
The page in the report that I find most useful is the graph on the last page, showing 12 years of rates compared to the Moody's AAA Corporate Bond rate. Amazing how well it tracks.
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Bustoff
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Re: Annuity -SPIA

Post by Bustoff »

I think the return on 5-year CD's is higher than the IRR on a joint survivor SPIA starting at age 62.
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ResearchMed
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Re: Annuity -SPIA

Post by ResearchMed »

jcjc wrote:We are nearing retirement less than 3 years maybe much sooner (currently age 62 and 55) and at some point would like to purchase a SPIA to cover our bare bones expenses since we have no pension only personal investments. Currently payout rates are dismal for joint life somewhere around 5% or less. Since I have been unable to find historical payout rates especially for male/female joint coverage I am wondering at what payout rate would you consider purchasing a SPIA? We will use appx. 1/4 of our for this purpose. We have no idea but I'm thinking of waiting for a minimum of 6% maybe more. Hoping we won't have to wait until age 70 to see rates go up. I really don't understand mortality credits I've seen mentioned here. The idea for us is to give us some peace of mind against market fluctuations. Unfortunately we don't have enough to just live off dividends and interest and SS unless we drastically changed our lifestyle.

Will probably be my first of many questions. New to this forum and happy to be here! Thank you
The "mortality credits" that you are mentioning are, well, a bit grim.

This is the true "insurance" part of an SPIA, and is the part of any annuity that one cannot "do by ones' self".

An SPIA works by having everyone who buys one (let's just assume all of the same age, no bells or whistles) pool their money, and give it to the insurance company ("X").

X has worked out life expectancy table such that they know what the average time is for this age group.
So X figures out what they can pay each person FOR LIFE.

Some people will die earlier than "average", and the money that wasn't paid back to them remains in the pool for everyone else.
And that whittling down of the number of people who keep getting paid... that's what allows the company to pay "more" than just the "principal and returns" on the amount paid by each individual.

Obviously, those who die early didn't 'do so well' (financially as well as lifetime).
But the main purpose of any SPIA is to assure one that money won't "run out" if one lives a very long time.

There are various bells and whistles, such as guarantees (even if one dies, the payments continue for a certain number of years, for example, to be paid to heirs), but each such "extra" will reduce the "monthly payment for life".

RM
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dhodson
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Re: Annuity -SPIA

Post by dhodson »

Mel Lindauer wrote:
jcjc wrote:We are nearing retirement less than 3 years maybe much sooner (currently age 62 and 55) and at some point would like to purchase a SPIA to cover our bare bones expenses since we have no pension only personal investments. Currently payout rates are dismal for joint life somewhere around 5% or less. Since I have been unable to find historical payout rates especially for male/female joint coverage I am wondering at what payout rate would you consider purchasing a SPIA? We will use appx. 1/4 of our investments for this purpose. We have no idea but I'm thinking of waiting for a minimum of 6% maybe more. Hoping we won't have to wait until age 70 to see rates go up. I really don't understand mortality credits I've seen mentioned here. The idea for us is to give us some peace of mind against market fluctuations. Unfortunately we don't have enough to just live off dividends and interest and SS unless we drastically changed our lifestyle.

Will probably be my first of many questions. New to this forum and happy to be here! Thank you
Several things influence the payout rate on a SPIA.

First is your age (or in your case, both ages) and the second major influence is the current interest rates. Since you're fairly young (that lowers the payout) and you're looking at a joint life (that lowers the payout even more) and current interest rates are very low (that lowers the payout), you're looking at a "perfect storm" for a low payout.

The longer you wait, the higher the payout will be because of your advanced ages. There's also the possibility of higher interest rates in place at that time.

Having said all that, if you need the guaranteed current income to live on, and you don't think your portfolio will support the withdrawal rate needed, then perhaps you just have to bite the bullet and accept the current lower SPIA payouts. The alternative would be to live off the money you're thinking of investing in the SPIA.
Nicely done
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Re: Annuity -SPIA

Post by Ron »

Bustoff wrote:I think the return on 5-year CD's is higher than the IRR on a SPIA starting at age 62.
It may be, but one must remember is that an SPIA is an income vehicle, not an investment vehicle - which a CD is.

An SPIA not only returns earnings (calculated on an IRR basis), but also a return of capital (e.g. premium paid) on a monthly basis. A CD cannot do this. Yes, you can get your "earnings" on a monthly/quarterly/annual basis, but that does not usually satisfy income requirements, which an SPIA is designed to do.

If you want to get at the principal of a CD, you're required to cash it in or purchase CD's in multiple's to cover short and extended periods of income desired.

I (along with my wife) have had an SPIA in place since mid-2007 and it was acquired to do multiple things. It acts as a private company pension (e.g. defined benefit plan) without an inflation rider (just as most company pensions are), since my former company eliminated pensions back in the early '80's; it allowed us to remove 10% of our then tax deferred funds for future consideration at age 70.5 for RMD's (our SPIA is considered a life payment, thus are removed from RMD consideration); it provided us with a monthly "paycheck" without having to worry about market flux; and unlike a private company pension, we opted for the 100% survivor benefit along with a guaranteed term, for a loss of around $20/month of monthly income. However, if we both die before the end of the term (28 years, calculated at the time we purchased it at joint age 59), the reminder payments go to our estate - quite unlike a private company pension plan.

BTW, it also allowed us to plan to delay SS until age 70 (both of us). Back in 2007, we were unaware of the file/suspend/restricted application rules (which we activated last year - my wife currently gets 50% of my FRA SS amount). We were just trying to come up with a method of having an additional source of income for the 11-year period between our (my) retirement until we would each draw our own SS benefit. The SPIA certainly worked out well for that scenario since we'll both be collecting our age-70 SS in less than three years.

FWIW,

- Ron
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jcjc
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Re: Annuity -SPIA

Post by jcjc »

Very helpful info! My husband thinks I'm brilliant with our investments but what he doesn't understand is it was easy following a Scott Burns style of investing! Now the real work begins and I am a little panicky. We may ?? Get a small lump sum selling our business and I like the idea of the tips to delay the annuity purchase. I also thought about using those funds to delay social security for him. I will be drawing ss on his earnings which were much higher than mine. So much to think about and hoping the market doesn't fall drastically in the mean time. I am also wondering if it is time to get professional help to set the stage for the future.
adamthesmythe
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Re: Annuity -SPIA

Post by adamthesmythe »

Bill M wrote:Hersh Stern (immediateannuities.com) does a monthly report of annuity rates. The most recent issue of his "Comparative Annuity Report" is available at: https://www.immediateannuities.com/comp ... y-reports/ (look at right margin, at bottom of page for historical issues).
The page in the report that I find most useful is the graph on the last page, showing 12 years of rates compared to the Moody's AAA Corporate Bond rate. Amazing how well it tracks.
Thank you for this very interesting link. However the plot doesn't say exactly what I think you said.

Note that the SPIA income is on the left axis and the bond yield is on the right axis. The axes have suppressed zero AND different scale (bond yield scale varies by more than a factor of two, income by less than a factor of two).

This plot says that SPIA income varies along with bond yield- but changes MUCH LESS than bond yield.
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