SPIA (Single Premium Immediate Annuities) vs SWR (Safe Withdrawal Rates) with no motive for legacy

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YererMeda
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SPIA (Single Premium Immediate Annuities) vs SWR (Safe Withdrawal Rates) with no motive for legacy

Post by YererMeda »

Say I have $1m when I retire and I want to use it all without running out of money.

The objective is to spend as much $ as possible without running out.

Which one is a better option: SPIA or SWR?
Marseille07
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Re: SPIA (Single Premium Immediate Annuities) vs SWR (Safe Withdrawal Rates) with no motive for legacy

Post by Marseille07 »

YererMeda wrote: Sun Jun 26, 2022 11:07 am Say I have $1m when I retire and I want to use it all without running out of money.

The objective is to spend as much $ as possible without running out.

Which one is a better option: SPIA or SWR?
What kind of SPIA can you buy with 1M? I think this depends a lot on your age and other factors.
7eight9
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Re: SPIA (Single Premium Immediate Annuities) vs SWR (Safe Withdrawal Rates) with no motive for legacy

Post by 7eight9 »

YererMeda wrote: Sun Jun 26, 2022 11:07 am Say I have $1m when I retire and I want to use it all without running out of money.

The objective is to spend as much $ as possible without running out.

Which one is a better option: SPIA or SWR?
SPIA:
70 year old male - Texas - 8.12% payout rate
70 year old female - Texas - 7.77% payout rate
Source - https://www.immediateannuities.com/a/gu ... gJ0sPD_BwE

SWR:
4%
Last edited by 7eight9 on Sun Jun 26, 2022 11:52 am, edited 1 time in total.
I guess it all could be much worse. | They could be warming up my hearse.
dbr
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Re: SPIA (Single Premium Immediate Annuities) vs SWR (Safe Withdrawal Rates) with no motive for legacy

Post by dbr »

YererMeda wrote: Sun Jun 26, 2022 11:07 am Say I have $1m when I retire and I want to use it all without running out of money.

The objective is to spend as much $ as possible without running out.

Which one is a better option: SPIA or SWR?
You are posing a question that has contradictory conditions.

One way to resolve that is that since you can run out of money using a withdrawal scheme derived from an SWR then that scheme is disqualified by your conditions. You have to use the SPIA if a condition is not running out of money. It is also possible depending on the terms to spend more money using the SPIA, but it is not guaranteed.

This assumes your meaning of SWR is that you invest the $1M in a portfolio of stocks and bonds in the ordinary sense and withdraw a fixed real dollar amount from the portfolio every year having set that withdrawal amount according to some model.

There are some problems with this analysis in that the payout of an SPIA depends on a person's age and the prevailing interest rates at which the insurance company can invest the contributions and the current actuarial analysis of the covered population, while on the other hand there are different models and conditions for setting a number for the SWR.
Last edited by dbr on Sun Jun 26, 2022 11:34 am, edited 1 time in total.
Marseille07
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Re: SPIA (Single Premium Immediate Annuities) vs SWR (Safe Withdrawal Rates) with no motive for legacy

Post by Marseille07 »

7eight9 wrote: Sun Jun 26, 2022 11:19 am
YererMeda wrote: Sun Jun 26, 2022 11:07 am Say I have $1m when I retire and I want to use it all without running out of money.

The objective is to spend as much $ as possible without running out.

Which one is a better option: SPIA or SWR?
SPIA:
70 year old male - Texas - 8.12% payout rate
70 year old male - Texas - 7.77% payout rate
Source - https://www.immediateannuities.com/a/gu ... gJ0sPD_BwE

SWR:
4%
What's the difference? Did you mean male & female?

Also keep in mind, SWR 4% is COLA, SPIA is not.
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Watty
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Re: SPIA (Single Premium Immediate Annuities) vs SWR (Safe Withdrawal Rates) with no motive for legacy

Post by Watty »

The big problem with a SPIA is that you they are rarely(never?) adjusted for inflation. One way to compensate for that is to budget and buy a series of SPIA at different ages so that the later SPIAs will make up for the purchasing power that is lost to inflation. For example you might buy a large one when you are 70 then buy smaller ones when you are 75, 80, etc.

This of course means that if you have a million dollar portfolio then you could not buy a million dollar SPIA when you are 70 since you would need to save some money to buy additional annuities when you are older.
YererMeda wrote: Sun Jun 26, 2022 11:07 am Which one is a better option: SPIA or SWR?
Diversification is like the a good choice so that you would be OK in various situations. You might want to consider splitting your money and investing part of it and buying a SPIA with part of it too.
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Re: SPIA (Single Premium Immediate Annuities) vs SWR (Safe Withdrawal Rates) with no motive for legacy

Post by Kenkat »

A SPIA is going to result in higher monthly income, although as pointed out, it is not adjusted for inflation in most cases. However, most of us already have an inflation adjusted income stream in the form of social security, either now or someday in the future.
7eight9
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Re: SPIA (Single Premium Immediate Annuities) vs SWR (Safe Withdrawal Rates) with no motive for legacy

Post by 7eight9 »

Marseille07 wrote: Sun Jun 26, 2022 11:29 am
7eight9 wrote: Sun Jun 26, 2022 11:19 am
YererMeda wrote: Sun Jun 26, 2022 11:07 am Say I have $1m when I retire and I want to use it all without running out of money.

The objective is to spend as much $ as possible without running out.

Which one is a better option: SPIA or SWR?
SPIA:
70 year old male - Texas - 8.12% payout rate
70 year old female - Texas - 7.77% payout rate
Source - https://www.immediateannuities.com/a/gu ... gJ0sPD_BwE

SWR:
4%
What's the difference? Did you mean male & female?

Also keep in mind, SWR 4% is COLA, SPIA is not.
I did mean male and female. I guess I need another cup of coffee.
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YererMeda
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Re: SPIA (Single Premium Immediate Annuities) vs SWR (Safe Withdrawal Rates) with no motive for legacy

Post by YererMeda »

Watty wrote: Sun Jun 26, 2022 11:32 am The big problem with a SPIA is that you they are rarely(never?) adjusted for inflation. One way to compensate for that is to budget and buy a series of SPIA at different ages so that the later SPIAs will make up for the purchasing power that is lost to inflation. For example you might buy a large one when you are 70 then buy smaller ones when you are 75, 80, etc.

This of course means that if you have a million dollar portfolio then you could not buy a million dollar SPIA when you are 70 since you would need to save some money to buy additional annuities when you are older.
YererMeda wrote: Sun Jun 26, 2022 11:07 am Which one is a better option: SPIA or SWR?
Diversification is like the a good choice so that you would be OK in various situations. You might want to consider splitting your money and investing part of it and buying a SPIA with part of it too.

Kenkat wrote: Sun Jun 26, 2022 11:45 am A SPIA is going to result in higher monthly income, although as pointed out, it is not adjusted for inflation in most cases. However, most of us already have an inflation adjusted income stream in the form of social security, either now or someday in the future.
Let's compare 🍎 to 🍎, so let's use, for both options, either inflation adjusted or unadjusted numbers.

If there are no SPIA products with inflation adjustment, then we can use the sum of the present value of all payouts, discounted by the inflation rate.
dbr
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Re: SPIA (Single Premium Immediate Annuities) vs SWR (Safe Withdrawal Rates) with no motive for legacy

Post by dbr »

YererMeda wrote: Sun Jun 26, 2022 12:19 pm

Let's compare 🍎 to 🍎, so let's use, for both options, either inflation adjusted or unadjusted numbers.

If there are no SPIA products with inflation adjustment, then we can use the sum of the present value of all payouts, discounted by the inflation rate.
True, but that doesn't work because you don't know in advance what inflation rate to use. In fact it varies all the time. There may be an out in that one can run an SWR model with a spending rule that withdrawals are not inflation indexed, if that is a realistic scenario for the retiree. The original Trinity study has a table like that and in that table the SWR is more like 6% rather than the usual quote of 4%.

But there is still a fundamental problem over the condition of not run out of money before death.
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Re: SPIA (Single Premium Immediate Annuities) vs SWR (Safe Withdrawal Rates) with no motive for legacy

Post by JayB »

7eight9 wrote: Sun Jun 26, 2022 11:19 am
YererMeda wrote: Sun Jun 26, 2022 11:07 am Say I have $1m when I retire and I want to use it all without running out of money.

The objective is to spend as much $ as possible without running out.

Which one is a better option: SPIA or SWR?
SPIA:
70 year old male - Texas - 8.12% payout rate
70 year old female - Texas - 7.77% payout rate
Source - https://www.immediateannuities.com/a/gu ... gJ0sPD_BwE

SWR:
4%
The SPIA and SWR values aren't directly comparable because SPIA payouts are certain for life (unless the insurance company goes belly up) whereas SWR values are based on stock & bond market performance and are not assured. Also, the classic 4% SWR rate is based on a 30-year drawdown period; since you are starting at age 70, you might want to research SWR rates for 25 years instead, which should be higher.

Furthermore, the after-tax values of the SPIA and SWR could be very different: from age 70 through your life expectancy in the 80's, SPIA payouts would mostly escape taxes (i.e., have a large exclusion ratio) because they are largely returning your initial purchase $ over those years; after your life expectancy, the SPIA payouts would be 100% taxable. On the other hand, a SWR portfolio in a taxable account would require annual taxes on capital gains and dividends; this could be a positive or negative compared to SPIAs.

Based just on the male number above, $1M would generate $81,200 annually in SPIA payouts. Some insurance companies offer graded SPIAs that start with lower annual payouts and increase by a fixed percentage each year; you pretty much have to outlive your life expectancy age to do better with these than with a level payout. Besides, most people spend less in real terms as the age; see Blanchett's retirement spending smile (https://retirementresearcher.com/retire ... ing-smile/).

By comparison, assuming a SWR starting value of 4%, the $1M would generate $40K the first year. With 3% assumed inflation, the withdrawals would be about $72K/yr. after 20 years -- still short of the SPIA amount.
Last edited by JayB on Sun Jun 26, 2022 12:57 pm, edited 2 times in total.
rgs92
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Re: SPIA (Single Premium Immediate Annuities) vs SWR (Safe Withdrawal Rates) with no motive for legacy

Post by rgs92 »

Enter the SPIA into Firecalc or cFIREsim and see if your success rate is high enough. Then do the same with a balanced portfolio (50/50 or 60/40 say).
Then try various mixes of part SPIA and part stock/bond portfolio.
Look at the cases with a near 100% success rate to meet your expense needs, pick some with which you are comfortable.
Examine the variability in the candidate portfolios to get a feeling for the underlying risk of each.
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Re: SPIA (Single Premium Immediate Annuities) vs SWR (Safe Withdrawal Rates) with no motive for legacy

Post by sandan »

This question is a bit abstract..

If I was forced to pick one, I would choose SPIA on the conditions that I had already 1) deferred SS till 70 and also 2) owned a low cost of ownership residence (low repairs/energy use/ tax increases etc.) Those two factors would absorb most of my inflation risk.

In the spirit of BH, it makes little sense to go 100% into SPIA or 100% SW planning. The future is not certain.
Last edited by sandan on Sun Jun 26, 2022 12:55 pm, edited 1 time in total.
Zeno
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Re: SPIA (Single Premium Immediate Annuities) vs SWR (Safe Withdrawal Rates) with no motive for legacy

Post by Zeno »

YererMeda wrote: Sun Jun 26, 2022 11:07 am Say I have $1m when I retire and I want to use it all without running out of money.

The objective is to spend as much $ as possible without running out.

Which one is a better option: SPIA or SWR?
dbr nailed it above. Your question is contradictory.

SWR is a withdrawal method, one disadvantage of which is that one can run out of money in blind reliance on it. The BH wiki on withdrawal methods is quite educational and informative on the major methods, including SWRs: https://www.bogleheads.org/wiki/Withdrawal_methods.

A SPIA, on the other hand, isn't a withdrawal method, but instead is an annuity. There are also many good threads here on topics such as SPIAs. SPIAs come in different flavors. SPIAs can be paired with withdrawal methods to provide an income floor, for example, subject to terms and conditions.

Nearly everybody wants to spend as much money as possible in retirement without running out, which is why retirement planning -- specifically including the withdrawal phrase -- takes some thoughtful person-specific pondering and analyses, and thus isn't amenable to resolution via one-sentence "either/or" type questions. The only true way to maximize spending in retirement "without running out" is to launch head-first into retirement with more money saved than one would ever possibly need. And even then there would still be uncertainties.

Edit: completed thought and corrected a typo
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Re: SPIA (Single Premium Immediate Annuities) vs SWR (Safe Withdrawal Rates) with no motive for legacy

Post by Taylor Larimore »

YererMeda wrote: Sun Jun 26, 2022 11:07 am Say I have $1m when I retire and I want to use it all without running out of money.

The objective is to spend as much $ as possible without running out.

Which one is a better option: SPIA or SWR?
YererMeda:

A Single Premium Immediate Annuity (SPIA) provides the largest guaranteed lifetime income.

I own two SPIAs which provides me with a worry-free and maintenance-free monthly income just like a fixed pension. I am very happy that we bought them when we were about 80 years old (I'm now 98).

A "Safe Withdrawal Rate: always leaves money behind at death if it doesn't run out of money first.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "I (probably prefer) an immediate annuity, which starts paying you right away."
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KeepItSimpleSomehow
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Re: SPIA (Single Premium Immediate Annuities) vs SWR (Safe Withdrawal Rates) with no motive for legacy

Post by KeepItSimpleSomehow »

YererMeda wrote: Sun Jun 26, 2022 11:07 am Say I have $1m when I retire and I want to use it all without running out of money.

The objective is to spend as much $ as possible without running out.

Which one is a better option: SPIA or SWR?
It is my understanding from "Stan the Annuity Man" and others in the annuity business that publish articles and videos, that one does NOT have the option to be 100% in annuities. That insurance companies, not the salespeople, have a maximum of something like 50-60%. It is not related to the amount each state guaranty covers. Maybe there is a case-by-case option? Has anyone purchased an annuity and can comment if this was part of the "purchase" process?
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YererMeda
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Re: SPIA (Single Premium Immediate Annuities) vs SWR (Safe Withdrawal Rates) with no motive for legacy

Post by YererMeda »

dbr wrote: Sun Jun 26, 2022 11:26 am
You are posing a question that has contradictory conditions.

One way to resolve that is that since you can run out of money using a withdrawal scheme derived from an SWR then that scheme is disqualified by your conditions. You have to use the SPIA if a condition is not running out of money. It is also possible depending on the terms to spend more money using the SPIA, but it is not guaranteed.

This assumes your meaning of SWR is that you invest the $1M in a portfolio of stocks and bonds in the ordinary sense and withdraw a fixed real dollar amount from the portfolio every year having set that withdrawal amount according to some model.

There are some problems with this analysis in that the payout of an SPIA depends on a person's age and the prevailing interest rates at which the insurance company can invest the contributions and the current actuarial analysis of the covered population, while on the other hand there are different models and conditions for setting a number for the SWR.

Zeno wrote: Sun Jun 26, 2022 12:55 pm
dbr nailed it above. Your question is contradictory.

SWR is a withdrawal method, one disadvantage of which is that one can run out of money in blind reliance on it. The BH wiki on withdrawal methods is quite educational and informative on the major methods, including SWRs: https://www.bogleheads.org/wiki/Withdrawal_methods.

A SPIA, on the other hand, isn't a withdrawal method, but instead is an annuity. There are also many good threads here on topics such as SPIAs. SPIAs come in different flavors. SPIAs can be paired with withdrawal methods to provide an income floor, for example, subject to terms and conditions.

Nearly everybody wants to spend as much money as possible in retirement without running out, which is why retirement planning -- specifically including the withdrawal phrase -- takes some thoughtful person-specific pondering and analyses, and thus isn't amenable to resolution via one-sentence "either/or" type questions. The only true way to maximize spending in retirement "without running out" is to launch head-first into retirement with more money saved than one would ever possibly need. And even then there would still be uncertainties.

Edit: completed thought and corrected a typo
If the contradiction is because there is a non-zero chance of running out of money when using SWR, then I must be using too high of a SWR.
sandan wrote: Sun Jun 26, 2022 12:55 pm This question is a bit abstract..
Correct.
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YererMeda
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Re: SPIA (Single Premium Immediate Annuities) vs SWR (Safe Withdrawal Rates) with no motive for legacy

Post by YererMeda »

Taylor Larimore wrote: Sun Jun 26, 2022 1:30 pm YererMeda:

A Single Premium Immediate Annuity (SPIA) provides the largest guaranteed lifetime income.

I own two SPIAs which provides me with a worry-free and maintenance-free monthly income just like a fixed pension. I am very happy that we bought them when we were about 80 years old (I'm now 98).

A "Safe Withdrawal Rate: always leaves money behind at death if it doesn't run out of money first.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "I (probably prefer) an immediate annuity, which starts paying you right away."
That is what I thought too because SPIA providers have the benefits of risk averaging but individuals don't. Thus individuals will be advised to be conservative by using a low SWR number and underspend. This obviously means individuals will leave money upon death which has zero value under the conditions stated in the original post.
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Re: SPIA (Single Premium Immediate Annuities) vs SWR (Safe Withdrawal Rates) with no motive for legacy

Post by RoadThunder »

Taylor Larimore wrote: Sun Jun 26, 2022 1:30 pm
YererMeda wrote: Sun Jun 26, 2022 11:07 am Say I have $1m when I retire and I want to use it all without running out of money.

The objective is to spend as much $ as possible without running out.

Which one is a better option: SPIA or SWR?
YererMeda:

A Single Premium Immediate Annuity (SPIA) provides the largest guaranteed lifetime income.

I own two SPIAs which provides me with a worry-free and maintenance-free monthly income just like a fixed pension. I am very happy that we bought them when we were about 80 years old (I'm now 98).

A "Safe Withdrawal Rate: always leaves money behind at death if it doesn't run out of money first.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "I (probably prefer) an immediate annuity, which starts paying you right away."
98 ! You’ve not only won the game you own it ! Congratulations
dbr
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Re: SPIA (Single Premium Immediate Annuities) vs SWR (Safe Withdrawal Rates) with no motive for legacy

Post by dbr »

YererMeda wrote: Sun Jun 26, 2022 1:45 pm
If the contradiction is because there is a non-zero chance of running out of money when using SWR, then I must be using too high of a SWR.
SWR is not an absolute parameter. All SWRs as we understand them are statistical estimates and by definition cannot be certain. It is even possible to withdraw zero from a portfolio and run out of money if one is invested in companies that go bankrupt and the stock becomes worthless and the bonds default.

This actually generates discussion on the forum. A common concern is that a SWR that comes from the worst case in the past might not be safe if a worse than worst case comes up in the future. This leaves the question how much one should reduce the withdrawal rate to be even safer. There really is no end that process.

A better way to assess what you really want to know is to accept the bounds of current estimates for SWRs, let's say 6% not inflation indexed for 30 years and compare that to the situation of a 70 year old person taking out an SPIA and being pretty sure they don't care what happens if they exceed age 100. The person spending SWR would spend $60,000/year. An SPIA taken out today would get a payout of $81,240.

The next step is to decide on changes to the scenario. Obvious changes would be to take an inflation indexed withdrawal of $40,000 and compare that to a scheme to spend $40,000 from the SPIA and invest the rest as a reserve against inflation and then see how that would work out. You could continue by changing the terms of the SWR to 20 years to reflect a more likely life span for a 70 year old and increase the SWR to 5%, or whatever it is. You can start a set of scenarios for a different starting age and length of retirement. You then tabulate all those scenarios and see what options look best to you and how much risk there is in picking the wrong scenario. Another possibility is to set the SWR at an arbitrary possibility of failure and then actually compute a joint probability of running out of money and still being alive. Milevsky once wrote a paper doing that. But now you are in probabilities and outcomes depend on conditions.

The essence of the problem is that future investment returns are not known, future inflation is not known, and your actual life span is not known. The mathematics of the situation make will result in the SWR scheme sometimes being better and the SPIA scheme sometimes being better.
dbr
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Re: SPIA (Single Premium Immediate Annuities) vs SWR (Safe Withdrawal Rates) with no motive for legacy

Post by dbr »

YererMeda wrote: Sun Jun 26, 2022 1:53 pm
Taylor Larimore wrote: Sun Jun 26, 2022 1:30 pm YererMeda:

A Single Premium Immediate Annuity (SPIA) provides the largest guaranteed lifetime income.

I own two SPIAs which provides me with a worry-free and maintenance-free monthly income just like a fixed pension. I am very happy that we bought them when we were about 80 years old (I'm now 98).

A "Safe Withdrawal Rate: always leaves money behind at death if it doesn't run out of money first.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "I (probably prefer) an immediate annuity, which starts paying you right away."
That is what I thought too because SPIA providers have the benefits of risk averaging but individuals don't. Thus individuals will be advised to be conservative by using a low SWR number and underspend. This obviously means individuals will leave money upon death which has zero value under the conditions stated in the original post.
The comment to that is a plan to spend exactly the predicted SWR is too narrow as one can adjust spending as more information becomes available as to what is happening. An SPIA once purchased can't be increased. In fact a significant area of investigation in SWRs is the effect of more complicated spending rules. An obvious but debatable one is to take a fixed withdrawal rate from the every year present portfolio value. By definition you can't run out of money, but you have shifted the risk to whether the income will be sufficient. Then the comparison to the SPIA is not whether you will run out but whether the income will be more sufficient in the one case or the other.

I think you are trying to find absolutes in a situation that does not have absolutes. The practical answer is to not try to decide as an either/or choice. I personally think a lot of people are very happy with combinations of portfolio withdrawals, Social Security, perhaps a COLAd or fixed pension, and the possible addition of one or more SPIA's. The choice of the latter could strongly depend on how much one already has in income streams.
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Re: SPIA (Single Premium Immediate Annuities) vs SWR (Safe Withdrawal Rates) with no motive for legacy

Post by Oicuryy »

YererMeda wrote: Sun Jun 26, 2022 12:19 pm Let's compare 🍎 to 🍎, so let's use, for both options, either inflation adjusted or unadjusted numbers.

If there are no SPIA products with inflation adjustment, then we can use the sum of the present value of all payouts, discounted by the inflation rate.
It is probably easiest to compare total nominal dollars received from the annuity to total nominal dollars withdrawn from a portfolio. For the annuity, multiply the annual payment amount by the number of years you will be alive to receive them. For the portfolio, use siamond's method to calculate the SWR for the same number of years.
viewtopic.php?t=240624

For example, using the 7.77% payout rate from 7eight9's post and assuming 15 years, the portfolio will beat the annuity if the harmonic mean of the portfolio's return is at least .0777 * 15 = 1.155. You just need to know how long you are going to live and what the harmonic mean of your portfolio's returns will be over that time period.

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Re: SPIA (Single Premium Immediate Annuities) vs SWR (Safe Withdrawal Rates) with no motive for legacy

Post by jhawktx »

KeepItSimpleSomehow wrote: Sun Jun 26, 2022 1:43 pm
YererMeda wrote: Sun Jun 26, 2022 11:07 am Say I have $1m when I retire and I want to use it all without running out of money.

The objective is to spend as much $ as possible without running out.

Which one is a better option: SPIA or SWR?
It is my understanding from "Stan the Annuity Man" and others in the annuity business that publish articles and videos, that one does NOT have the option to be 100% in annuities. That insurance companies, not the salespeople, have a maximum of something like 50-60%. It is not related to the amount each state guaranty covers. Maybe there is a case-by-case option? Has anyone purchased an annuity and can comment if this was part of the "purchase" process?
Hmmm. Assuming you buy multiple SPIA's issued by different insurance companies, how will they even know what % of your total available balance is in SPIA's?
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Re: SPIA (Single Premium Immediate Annuities) vs SWR (Safe Withdrawal Rates) with no motive for legacy

Post by heyyou »

I took the no-COLA pension at 55, then spent portfolio funds to delay SS to age 70 for its higher payout and its annual inflation boosts on the higher amount. Note the multi-step, time-based plan.

The 4% SWR is not the only choice for retirement spending. It was just far better than the unresearched suggestions that preceded it, i.e. buying only dividend paying stocks. (1) SWR method is known for leaving excessive funds unspent (good for heirs) if your specific 30 years does not include some near worst case annual portfolio returns. (2) SWR failed for a few starting years (late 1960s) of early high inflation on 30 year retirements that had not ended when Bengen was doing his 1991-1992 research. Big ERN and McClung both have tables that show remaining portfolio values after 30 years of spending at the 4% SWR, for each beginning year. The tables even show the portfolio balances for each year of the 30 year retirements starting every year since the annual return data has been available.

Hence, I am using a variable spending plan named "RMD spending method" that (1) is longevity based (annual spending % rises with age using your RMD % from your traditional IRA) and (2) the rising % is applied to each recent, entire annual portfolio value, plus annually spending interest and dividends. Yes, the risk is variable spending but I can see next year's income changes as my portfolio value fluctuates this year. I welcome those adjustments since they are either helping portfolio longevity when the portfolio is shrinking, or boosting my income if the portfolio is rising.

SPIAs are based on buying long term bonds which currently have had extremely low % payouts, due to low but now rising bond rates. There is too much risk in the 4% SWR for the next thirty year future period of unknown inflation rates, with the second strike against SWR being its possible under spending mentioned above. SWR was better than every previous retirement spending method when it was introduced, but with more data and more thorough research, now there are better retirement spending methods.
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Re: SPIA (Single Premium Immediate Annuities) vs SWR (Safe Withdrawal Rates) with no motive for legacy

Post by grabiner »

If an inflation-adjusted SPIA were available, this would guarantee not running out of money, at a higher rate than the SWR from a portfolio. The main reason is that withdrawing from a portfolio at an SWR needs to cover a potentially long life without running out, while an annuity payout is based on exhausting the amount invested over your life expectancy.

But even without an inflation adjustment, you can still probably do better with the SPIA. You can't afford to spend the entire first year's payout, since the payout will decline with inflation; instead, spend a lesser amount, and invest the remainder in TIPS or I-Bonds. Inflation will still affect the amount you can spend; if inflation in the first year is high, then you will need to spend more of the SPIA payment in the second year to maintain the same standard of living, and thus have less to invest in TIPS for later spending.

You can get an inflation-adjusted SPIA for part of your portfolio on very good terms by delaying Social Security to age 70. This works just like a new SPIA purchase every month from ages 62-70. You give up your age-62 first month's SS benefit to get a slightly higher SS payment for the rest of your life, then do the same at 62 and 1 month, 62 and 2 months,..., 69 and 11 months. If you need a SPIA, all of these are good deals, because they reduce longevity risk. (Most of them have positive expected value as well, although this depends on your health and on whether you are the higher-earning or lower-earning spouse in a couple.)
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Ben Mathew
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Re: SPIA (Single Premium Immediate Annuities) vs SWR (Safe Withdrawal Rates) with no motive for legacy

Post by Ben Mathew »

grabiner wrote: Sun Jun 26, 2022 9:36 pm But even without an inflation adjustment, you can still probably do better with the SPIA. You can't afford to spend the entire first year's payout, since the payout will decline with inflation; instead, spend a lesser amount, and invest the remainder in TIPS or I-Bonds. Inflation will still affect the amount you can spend; if inflation in the first year is high, then you will need to spend more of the SPIA payment in the second year to maintain the same standard of living, and thus have less to invest in TIPS for later spending.
Would it be better to reverse the order of TIPS and SPIA in this plan? i.e. Use a TIPS ladder for the first part of retirement when mortality risk is low and the benefit from annuitization is correspondingly low. Spending can be funded by a TIPS ladder till say age 80. At age 80 when mortality risk is high and the benefits to annuitization outweighs the lack of inflation indexing, switch to SPIAs. This SPIA purchase can be funded by a special lump sum TIPS payout at age 80. So a SPIA provides longevity insurance when it's needed the most. And inflation risk is limited to the last couple decades of life.
Total Portfolio Allocation and Withdrawal (TPAW)
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Re: SPIA (Single Premium Immediate Annuities) vs SWR (Safe Withdrawal Rates) with no motive for legacy

Post by JackoC »

jhawktx wrote: Sun Jun 26, 2022 4:21 pm
KeepItSimpleSomehow wrote: Sun Jun 26, 2022 1:43 pm
YererMeda wrote: Sun Jun 26, 2022 11:07 am Say I have $1m when I retire and I want to use it all without running out of money.

The objective is to spend as much $ as possible without running out.

Which one is a better option: SPIA or SWR?
It is my understanding from "Stan the Annuity Man" and others in the annuity business that publish articles and videos, that one does NOT have the option to be 100% in annuities. That insurance companies, not the salespeople, have a maximum of something like 50-60%. It is not related to the amount each state guaranty covers. Maybe there is a case-by-case option? Has anyone purchased an annuity and can comment if this was part of the "purchase" process?
Hmmm. Assuming you buy multiple SPIA's issued by different insurance companies, how will they even know what % of your total available balance is in SPIA's?
I'd never heard of that, it's interesting. But I guess they would simply ask you in the final paperwork when you buy what other annuities you already have. I can't think of a risk to them this would address besides making it harder for me to sue them claiming their misleading or abusive sales tactics caused me to buy too much SPIA. In which case, or if it's simply required by (some states'?) regulators, the insurance company would presumably be off the hook as long as they asked, wouldn't matter to them if my answer was correct.

On general question. I see the major factors as a) no inflation protection on SPIA's, doesn't rule them out but it's a significant issue b) past studies and tools like FireCalc using the past return distributions to calculate '% failure' can't be taken literally with lower starting stock earnings yields and bond yields now though adjusting those answer to now's situation shouldn't cause a huge reduction in the % if you just need to not run out of money in a normal length retirement, especially if you can easily reduce spending if need be c) no legacy requirement, at all, should tilt you relatively more towards SPIA's than the same person would be if they preferred to leave a legacy. Whatever calculation you think is realistic for SWR on a portfolio with pretty large stock allocation, if it has a have a small % chance of ending at zero it will have a big chance of ending up with much more than zero. If there's nobody (or organization) you want to leave money too, an arrangement which only pays you as long as you live, assuming competitively priced, is inherently more relatively attractive than if there are people/orgs you want to leave money to, even if you wouldn't arrange things to be *sure* of leaving them anything.
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Re: SPIA (Single Premium Immediate Annuities) vs SWR (Safe Withdrawal Rates) with no motive for legacy

Post by Taylor Larimore »

Bogleheads:

After purchasing our SPIA annuities to provide a comfortable lifetime income for my wife and myself, it was no longer necessary for us to save for retirement. This has allowed us to give our heirs our extra income and savings before we die--not after.

Best wishes
Taylor
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Re: SPIA (Single Premium Immediate Annuities) vs SWR (Safe Withdrawal Rates) with no motive for legacy

Post by valleyrock »

Taylor Larimore wrote: Mon Jun 27, 2022 7:27 am Bogleheads:

After purchasing our SPIA annuities to provide a comfortable lifetime income for my wife and myself, it was no longer necessary for us to save for retirement. This has allowed us to give our heirs our extra income and savings before we die--not after.

Best wishes
Taylor
I like this. Because there's no sort of anticipation of an inheritance on the part of heirs. It's human nature to anticipate an inheritance, and yet there can be some guilt uncomfortably tied to it. And you get to see the fruits of the sharing, and maybe even provide some advice/direction on how it's used along the way.
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Re: SPIA (Single Premium Immediate Annuities) vs SWR (Safe Withdrawal Rates) with no motive for legacy

Post by JoMoney »

To the extent that I would otherwise have a large bond or other fixed income holding that I was drawing down principal and interest on over my expected remaining life, I'd rather have a SPIA.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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Re: SPIA (Single Premium Immediate Annuities) vs SWR (Safe Withdrawal Rates) with no motive for legacy

Post by dbr »

JoMoney wrote: Mon Jun 27, 2022 7:52 am To the extent that I would otherwise have a large bond or other fixed income holding that I was drawing down principal and interest on over my expected remaining life, I'd rather have a SPIA.
This is true, especially that an SPIA is letting someone else hold long bonds to pay off annual stipends while pooling longevity risk. One wonders if an insurance company could not have funded inflation indexed SPIAs with long TIPS.

The tradeoff for the OP of this thread is having stocks to support an SWR limited portfolio withdrawal. An all bond portfolio does not support as high an SWR as a mixed stock and bond portfolio does by a large margin.

Someone might review Pfau's suggestion of combining SPIAs with stocks in place of bonds with stocks.
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Re: SPIA (Single Premium Immediate Annuities) vs SWR (Safe Withdrawal Rates) with no motive for legacy

Post by JayB »

Taylor Larimore wrote: Mon Jun 27, 2022 7:27 am Bogleheads:

After purchasing our SPIA annuities to provide a comfortable lifetime income for my wife and myself, it was no longer necessary for us to save for retirement. This has allowed us to give our heirs our extra income and savings before we die--not after.

Best wishes
Taylor
This can be attractive IF you have a way to pay for potential long term care expenses. Also gifting before death can be attractive IF you're not concerned about the Medicaid look-back period reducing eligibility for assistance after assets are largely drawn down.
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Re: SPIA (Single Premium Immediate Annuities) vs SWR (Safe Withdrawal Rates) with no motive for legacy

Post by Wrench »

jhawktx wrote: Sun Jun 26, 2022 4:21 pm
KeepItSimpleSomehow wrote: Sun Jun 26, 2022 1:43 pm
YererMeda wrote: Sun Jun 26, 2022 11:07 am Say I have $1m when I retire and I want to use it all without running out of money.

The objective is to spend as much $ as possible without running out.

Which one is a better option: SPIA or SWR?
It is my understanding from "Stan the Annuity Man" and others in the annuity business that publish articles and videos, that one does NOT have the option to be 100% in annuities. That insurance companies, not the salespeople, have a maximum of something like 50-60%. It is not related to the amount each state guaranty covers. Maybe there is a case-by-case option? Has anyone purchased an annuity and can comment if this was part of the "purchase" process?
Hmmm. Assuming you buy multiple SPIA's issued by different insurance companies, how will they even know what % of your total available balance is in SPIA's?
You cannot spend all of your savings on an annuity - the application would not be approved by the company. During the annuity application, you are required to provide a statement of your assets and whether you hold other annuities. You attest on signing the application that you have fully disclosed all the relevant information. I do not believe they do any checks on what you tell them, and you are not required to provide supporting documentation verifying your holdings. But, I suspect should something go wrong in the future, or they found out you were not truthful, your contract could be voided.

Wrench
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Re: SPIA (Single Premium Immediate Annuities) vs SWR (Safe Withdrawal Rates) with no motive for legacy

Post by jhawktx »

Ok, then in that case, what is the maximum % of savings you are allowed to use to purchase SPIAs? 50%? 80%? 99%?
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Re: SPIA (Single Premium Immediate Annuities) vs SWR (Safe Withdrawal Rates) with no motive for legacy

Post by Wrench »

jhawktx wrote: Mon Jun 27, 2022 4:59 pm Ok, then in that case, what is the maximum % of savings you are allowed to use to purchase SPIAs? 50%? 80%? 99%?
Only the insurance companies know for sure. But, the guess is that it is about 50%. See
https://www.stantheannuityman.com/how-t ... -portfolio

Wrench
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Re: SPIA (Single Premium Immediate Annuities) vs SWR (Safe Withdrawal Rates) with no motive for legacy

Post by InNameOnly »

This discussion is all speculative unless someone has a crystal ball. Don’t be distracted by all the variables. Go back to your roots and think diversity vs the unknown. Check more than one box.

I will offer DW and I, here and now as an out of control sample of one. We are 50/25/25, equity/bonds/annuity. 70 is my next mile marker where good things start to happen, been riding on cash the few years. Next year my full SS and annuity start, that equals 1.5X current expenses. This still leaves us with 75% (equities/bonds) to cover inflation and lumpy expenses that exceed our base income. Will this be the perfect formula? I will do my best to report annually. Remember, the glass is completely full.
The realist sees the glass as completely full, 50% water and 50% air.
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Re: SPIA (Single Premium Immediate Annuities) vs SWR (Safe Withdrawal Rates) with no motive for legacy

Post by HRG »

Does an SPIA work the same way as the other annuities in that if I forked over $1M and kicked the bucket next week, the insurance company gets all the money? Is there a death benefit with an SPIA? What are the risks in purchasing an SPIA?
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Re: SPIA (Single Premium Immediate Annuities) vs SWR (Safe Withdrawal Rates) with no motive for legacy

Post by sycamore »

HRG wrote: Tue Jun 28, 2022 1:51 pm Does an SPIA work the same way as the other annuities in that if I forked over $1M and kicked the bucket next week, the insurance company gets all the money? Is there a death benefit with an SPIA? What are the risks in purchasing an SPIA?
It depends on what kind of SPIA you get. There is a "period certain" option available, like for 5, 10, 15 years.

There's some reading material on the Bogleheads wiki: https://www.bogleheads.org/wiki/Immediate_fixed_annuity
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Re: SPIA (Single Premium Immediate Annuities) vs SWR (Safe Withdrawal Rates) with no motive for legacy

Post by ryman554 »

Wrench wrote: Mon Jun 27, 2022 9:58 am
You cannot spend all of your savings on an annuity - the application would not be approved by the company. During the annuity application, you are required to provide a statement of your assets and whether you hold other annuities. You attest on signing the application that you have fully disclosed all the relevant information. I do not believe they do any checks on what you tell them, and you are not required to provide supporting documentation verifying your holdings. But, I suspect should something go wrong in the future, or they found out you were not truthful, your contract could be voided.
What is the reason behind this?

It's not like the annuity buyer is going in debt in any way to the insurance company... so there seems to be little risk to the insurer. In fact, since insurance companies have nice big marble buildings full of executives with boats, you would think it is in their interest to allow folks to buy however much annuity they want. So there much be some regulation? But why?
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Re: SPIA (Single Premium Immediate Annuities) vs SWR (Safe Withdrawal Rates) with no motive for legacy

Post by Wrench »

ryman554 wrote: Wed Jun 29, 2022 10:29 am
Wrench wrote: Mon Jun 27, 2022 9:58 am
You cannot spend all of your savings on an annuity - the application would not be approved by the company. During the annuity application, you are required to provide a statement of your assets and whether you hold other annuities. You attest on signing the application that you have fully disclosed all the relevant information. I do not believe they do any checks on what you tell them, and you are not required to provide supporting documentation verifying your holdings. But, I suspect should something go wrong in the future, or they found out you were not truthful, your contract could be voided.
What is the reason behind this?

It's not like the annuity buyer is going in debt in any way to the insurance company... so there seems to be little risk to the insurer. In fact, since insurance companies have nice big marble buildings full of executives with boats, you would think it is in their interest to allow folks to buy however much annuity they want. So there much be some regulation? But why?
From the link I cited above:
"Over a decade ago, there's lots of lawsuits from consumers that they put all their money into annuities and they sued the carriers for allowing them to do that. There wasn't anything wrong with the annuities, they were just in fixed annuities. Since then, the annuity industry itself and the carriers have put some things in place from an application standpoint, suitability and appropriateness to protect you, the client."

Essentially, the insurance companies are protecting themselves from lawsuits saying the "greedy insurance salesman" took advantage of the "little old ladies (and gentlemen)" by encouraging them to put all their money in one place without completely understanding the risks. Right or wrong, that's apparently now the industry standard.

Wrench
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