Market-timing an SPIA purchase

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adamthesmythe
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Market-timing an SPIA purchase

Post by adamthesmythe »

This is inspired by a link posted by Bill M concerning the relation between SPIA yields and interest rates.

In https://www.immediateannuities.com/pdfs ... -Issue.pdf there is a plot showing a strong correlation between SPIA income and corporate bond interest rates. (See page 2). However a casual look at the plot gives the wrong story. There IS a correlation but it is weak.

The data for SPIA income looks like it exactly tracks corporate bonds but this is not the correct conclusion because the axes are different.

In fact an approximate relation between the two is

SPIA income ($/month*$100000) = $53*(bond yield in %) + $304

or in one example- when the corporate bond rate doubles from 3% to 6% the SPIA income increases from about $463 to about $622 ( a factor of 1.34).

There IS a benefit to buying an SPIA when bond yield is higher. On the other hand when bond yields are high inflation tends to be higher and the purchase of a fixed-yield SPIA looks less attractive.
555
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Re: Market-timing an SPIA purchase

Post by 555 »

Why not convert the SPIA income to annual income as a percentage of the single premium. Then you can see the relation more clearly.
skepticalobserver
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Re: Market-timing an SPIA purchase

Post by skepticalobserver »

Buy the corporate, clip the coupons--forget giving your money away.
The commercially available SPIA is the single most ridiculous idea passing for "insurance."
Gill
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Re: Market-timing an SPIA purchase

Post by Gill »

skepticalobserver wrote:Buy the corporate, clip the coupons--forget giving your money away.
The commercially available SPIA is the single most ridiculous idea passing for "insurance."
There are many very sophisticated individuals who feel differently.
Gill
Last edited by Gill on Wed Mar 18, 2015 8:14 am, edited 1 time in total.
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
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ResearchMed
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Re: Market-timing an SPIA purchase

Post by ResearchMed »

Gill wrote:
skepticalobserver wrote:Buy the corporate, clip the coupons--forget giving your money away.
The commercially available SPIA is the single most ridiculous idea passing for "insurance."
Take this advice for what it's worth. There are many very sophisticated individuals who feel differently.
Gill
Right.

There is no way to do this "on one's own" ("clipping coupons" or any other way) AND to get those mortality credits.

This may not be what everyone wants or needs, and for them, SPIA's may not be ideal.

But for those with no legacy desires, and instead with a desire not to outlive one's money, and also to be able to spend as much as possible, plain vanilla annuities are unmatched.
(Okay, perhaps a good old fashioned tontine, but those aren't available these days, not to mention the perverse incentives inherent in those :twisted:)

RM
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Topic Author
adamthesmythe
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Re: Market-timing an SPIA purchase

Post by adamthesmythe »

> Why not convert the SPIA income to annual income as a percentage of the single premium. Then you can see the relation more clearly.

Doing this (multiplying by 12/1000) gives the relation

SPIA yield (yearly % of original payment) = 0.64*(bond yield in %) + 3.6%

and this helps address the comment

>Buy the corporate, clip the coupons--forget giving your money away.

Suppose corporate bonds yield 5%. An SPIA purchased at the same time would yield about 6.8%.
555
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Re: Market-timing an SPIA purchase

Post by 555 »

adamthesmythe wrote:> Why not convert the SPIA income to annual income as a percentage of the single premium. Then you can see the relation more clearly.

Doing this (multiplying by 12/1000) gives the relation

SPIA yield (yearly % of original payment) = 0.64*(bond yield in %) + 3.6%

and this helps address the comment

>Buy the corporate, clip the coupons--forget giving your money away.

Suppose corporate bonds yield 5%. An SPIA purchased at the same time would yield about 6.8%.
These numbers make back-of-the-envelope sense.
The 3.6% is return of principle considering life expectancy, insurance co profit etc).
0.64*(bond yield in %) is the interest from the bonds, and it is 0.64 (more than 0.5, less than 1) since the interest is on a principle that decreases over time as payout are made.
The relation between SPIA yield and bond yield should be non-linear, with slope near 0.5 when bond yields are near zero, slope near 1 when bond yields are high.

And yes, you could just hold the bonds yourself a give yourself these payouts, but you will run out of money after a time somewhat longer than average life expectancy.
skepticalobserver
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Re: Market-timing an SPIA purchase

Post by skepticalobserver »

Gll:

Some pretty sophisticated types bought into Madoff too.

By the age the annuitant starts to receive a positive return he's revising the will once or twice a month (I was tempted with more a descriptive metaphor, but you get the picture).

It's Gerber Whole Life for adults.
Gill
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Re: Market-timing an SPIA purchase

Post by Gill »

It's insurance, not an investment. Do you hope your house will burn down so your homeowners premium isn't wasted? I'll be happy to see those checks coming in when I'm drooling in my soup. Enough of this. You're hijacking this thread.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
ourbrooks
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Re: Market-timing an SPIA purchase

Post by ourbrooks »

SPIA payouts are heavily dependent on age. An approximate formula for the payout percentage is 1/remaining-life-expectancy + 10-year-TBill rate.
For someone age 65, that works out to 1/19.4 + 1.91% = 6.99%, fairly close to what immediateannuities.com is paying.

As you get older and remaining life expectancy decreases, the percentage due to life expectancy gets larger. At age 80, the percentage grows to 11% for an overall payout of roughly 12.99%.
The payouts of SPIAs at younger ages, on the other hand, are dominated by the interest rates. The best way to market time an SPIA is to wait until you're older before you start it.

An alternative to SPIAs would be simply to accumulate enough money and spend it at a low enough rate so that you never run out, no matter how long you live. Of course, you've got to plan for the worst case, say, living to 110, and save/spend accordingly. Very few people actually live that long, so most of the time the heirs receive large bequests. If what you want to do is live a penurious life style so that, on your death, there's a large chance you can endow a university chair, then, clearly, SPIAs are not for you.

Another way to view it is if you buy an SPIA and live longer than expected, you'll at least have the pleasure of socking it to an insurance company and, regardless of how long you live, you always have the pleasure of knowing that your money grabbing relatives won't get a cent.
Bill M
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Re: Market-timing an SPIA purchase

Post by Bill M »

The payout from a SPIA increases as you get older. That part is easy to do some market timing (but whether its useful is another matter entirely).
adamthesmythe wrote: SPIA yield (yearly % of original payment) = 0.64*(bond yield in %) + 3.6%
For a fixed age, payout rates over time vary with bond yields. So if you can predict bond yields, you can also predict SPIA payouts. You're trading one impossible problem for another.

If you had a lump sum to invest in the stock market, would you do it all at once or spread out over several months/years? Its a question where reasonable people disagree. I see SPIA purchases as the same problem. My solution is to spread out the purchase, so at most half (or a third) will be at the worst possible time.
555
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Re: Market-timing an SPIA purchase

Post by 555 »

Is it the case that the insurance co mostly buys corporates, not treasuries?
stlrick
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Re: Market-timing an SPIA purchase

Post by stlrick »

Bill M wrote:The payout from a SPIA increases as you get older. That part is easy to do some market timing (but whether its useful is another matter entirely).
adamthesmythe wrote: SPIA yield (yearly % of original payment) = 0.64*(bond yield in %) + 3.6%
For a fixed age, payout rates over time vary with bond yields. So if you can predict bond yields, you can also predict SPIA payouts. You're trading one impossible problem for another.

If you had a lump sum to invest in the stock market, would you do it all at once or spread out over several months/years? Its a question where reasonable people disagree. I see SPIA purchases as the same problem. My solution is to spread out the purchase, so at most half (or a third) will be at the worst possible time.
If we all agree that the SPIA payout (I think "yield" is an ambiguous term with an SPIA) goes up with increasing starting age, where is that factor included in this equation? If the 3.6% includes the effects of both mortality credits and return of principal, it cannot be a constant. It goes up with increasing starting age.
555
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Re: Market-timing an SPIA purchase

Post by 555 »

stlrick wrote:If we all agree that the SPIA payout (I think "yield" is an ambiguous term with an SPIA) goes up with increasing starting age, where is that factor included in this equation? If the 3.6% includes the effects of both mortality credits and return of principal, it cannot be a constant. It goes up with increasing starting age.
The "constant" is the constant in a linear approximation, so it doesn't literally represent something in particular. Yes it depends on age and gender. (It was for 65 yo male). It is approximately (1/life_expectancy) minus profit plus or minus fudge factors.
Bill M
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Re: Market-timing an SPIA purchase

Post by Bill M »

stlrick wrote:.... up with increasing starting age, where is that factor included in this equation? If the 3.6% includes the effects of both mortality credits and return of principal, it cannot be a constant. It goes up with increasing starting age.
The chart that started this thread (see first posting for link) was for age 65 male and 65 female, life with 10 year certain. The table on the page preceding the chart gives figures for other ages.
skepticalobserver
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Re: Market-timing an SPIA purchase

Post by skepticalobserver »

Gil:

The typical fire insurance policy, which is usually not a single premium product, has rather large payout compared to the premiums. The SPIA payout, that is the cash on cash return after many years of negative IRR, is statistically disproportionally tiny compared to the size of up-front lump sum premium.
Gill
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Re: Market-timing an SPIA purchase

Post by Gill »

skepticalobserver wrote:Gil:

The typical fire insurance policy, which is usually not a single premium product, has rather large payout compared to the premiums. The SPIA payout, that is the cash on cash return after many years of negative IRR, is statistically disproportionally tiny compared to the size of up-front lump sum premium.
SPIA's have been discussed on this forum ad nauseum. I'm not smart enough to add to the discussion, but I'll keep enjoying the checks for the rest of my life and not worry about IRR.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
skepticalobserver
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Re: Market-timing an SPIA purchase

Post by skepticalobserver »

[OT comments removed by admin LadyGeek]
stlrick
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Re: Market-timing an SPIA purchase

Post by stlrick »

Skepticalobserver:

This is not the first time your cynical, negative, juvenile, insulting, ad hominem comments have made it unpleasant to follow a thread in which I had an interest. Please please stop. If you don't have something substantive to say, say nothing. If your personal agenda is off topic, stay away.

Rick
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