Is an SPIA a good way now to lock in high short term rates for the long term?

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rgs92
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Is an SPIA a good way now to lock in high short term rates for the long term?

Post by rgs92 »

OK, I made another comment about this in another recent thread about SPIAs (by HomerJ; link at bottom) and I felt it was worth a separate thread since it got me thinking. I hope this is OK.

But I think that these very high short term rates will not last, and the only instrument available to lock in these high rates for the long term is an SPIA, which can pay upwards of 6%.

I am aware that this is an IRR (internal rate of return with principal being returned), but even so, the rate is very high and the income is substantial, much better than you could get with a long term bond (20+ years).
And it's safe and lasts for life.

Am I thinking correctly here? Thank you.

HomerJ's thread:
viewtopic.php?f=10&t=405542&newpost=7290255
Chuck
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Re: Is an SPIA a good way now to lock in high short term rates for the long term?

Post by Chuck »

Typically you can only lock in short-term rates for a short term.

I don't know a lot about SPIAs, but I'll assume longer term rates are more relevant. Those have not changed much.
jebmke
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Re: Is an SPIA a good way now to lock in high short term rates for the long term?

Post by jebmke »

IMO unless you need the insurance wrapper (whether the need is real or behavioral), a SPIA isn't a good deal.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
fyre4ce
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Re: Is an SPIA a good way now to lock in high short term rates for the long term?

Post by fyre4ce »

There is really no way to lock in high short-term rates for a long term. If you buy one-year treasuries and rates drop a lot within the next year, you'll be forced to reinvest the proceeds at a lower rate when the treasuries mature.

Your question seems to presuppose that SPIA rates are tied to short-term rates. I don't think this is accurate, except maybe for someone very old buying a SPIA where their life expectancy is short. For someone buying a SPIA with a couple decades of life expectancy, the rate should be tied to intermediate or long-term rates.

If you want to lock in long-term rates, buy long-term bonds. Buying a SPIA adds insurance, which has a net cost. So unless you need the insurance component of a SPIA, traditional investments are a better choice.
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Stinky
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Re: Is an SPIA a good way now to lock in high short term rates for the long term?

Post by Stinky »

An insurance company purchases assets to roughly duration-match its liabilities.

A SPIA is a “long” liability. So “long” assets would be purchased against the liability.

Todays elevated short term rates shouldn’t impact SPIA prices at all.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
adamthesmythe
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Re: Is an SPIA a good way now to lock in high short term rates for the long term?

Post by adamthesmythe »

No. Because (1) SPIA payouts are only weakly influenced by interest rates and (2) payouts are more influenced by long-term interest rates.

Think of it this way. Suppose you know exactly your lifetime. You could buy bonds maturing at 1,2,...N years to fund your payout for each year. To absolutely eliminate risk the maturities would be 1.2,...N years. Your payout rate would be some sort of weighted average, weighted more strongly to the long term interest rate.
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Stinky
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Re: Is an SPIA a good way now to lock in high short term rates for the long term?

Post by Stinky »

adamthesmythe wrote: Tue May 30, 2023 3:02 pm No. Because (1) SPIA payouts are only weakly influenced by interest rates and (2) payouts are more influenced by long-term interest rates.

Think of it this way. Suppose you know exactly your lifetime. You could buy bonds maturing at 1,2,...N years to fund your payout for each year. To absolutely eliminate risk the maturities would be 1.2,...N years. Your payout rate would be some sort of weighted average, weighted more strongly to the long term interest rate.
You would actually need very few bonds with short maturities, because the early duration SPIA payments would be substantially covered by the coupons on the bonds that mature in later years.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
petulant
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Re: Is an SPIA a good way now to lock in high short term rates for the long term?

Post by petulant »

SPIA payout rates went up because long-term rates went up, not because short-term rates did. Per FRED, the Moody's Seasoned Baa Corporate Bond Yield (a measure of long-term corporate bond rates) went from 3.16 in December 2020 to 5.53 in April 2023 (the most recent observation). Hence, long-term rates went up 237 bps.
michaeljc70
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Re: Is an SPIA a good way now to lock in high short term rates for the long term?

Post by michaeljc70 »

jebmke wrote: Tue May 30, 2023 1:45 pm IMO unless you need the insurance wrapper (whether the need is real or behavioral), a SPIA isn't a good deal.
+1

Inflation is 4.6% now. If inflation stays high (or goes high again in the future) that could kill you if you don't have inflation protection.
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Taylor Larimore
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Re: Is an SPIA a good way now to lock in high short term rates for the long term?

Post by Taylor Larimore »

IMO unless you need the insurance wrapper (whether the need is real or behavioral), a SPIA isn't a good deal.
\

Jembke:

I own two SPIAs. I am not aware of any "insurance wrapper" available in my Single Premium Immediate Annuities. Can you explain?

Taylor
Jack Bogle's Words of Wisdom: "Depending on the particular circumstances, annuities are a good idea, but only annuities available at very low cost and commensurately high return."
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pizzy
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Re: Is an SPIA a good way now to lock in high short term rates for the long term?

Post by pizzy »

Taylor Larimore wrote: Tue May 30, 2023 5:37 pm
IMO unless you need the insurance wrapper (whether the need is real or behavioral), a SPIA isn't a good deal.
\

Jembke:

I own two SPIAs. I am not aware of any "insurance wrapper" available in my Single Premium Immediate Annuities. Can you explain?

Taylor
Jack Bogle's Words of Wisdom: "Depending on the particular circumstances, annuities are a good idea, but only annuities available at very low cost and commensurately high return."
I believe he means the guarantee the insurance company provides.
Vanguard/Fidelity | 76% US Stock | 16% Int'l Stock | 8% Cash
jebmke
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Re: Is an SPIA a good way now to lock in high short term rates for the long term?

Post by jebmke »

pizzy wrote: Tue May 30, 2023 5:39 pm
Taylor Larimore wrote: Tue May 30, 2023 5:37 pm
IMO unless you need the insurance wrapper (whether the need is real or behavioral), a SPIA isn't a good deal.
\

Jembke:

I own two SPIAs. I am not aware of any "insurance wrapper" available in my Single Premium Immediate Annuities. Can you explain?

Taylor
Jack Bogle's Words of Wisdom: "Depending on the particular circumstances, annuities are a good idea, but only annuities available at very low cost and commensurately high return."
I believe he means the guarantee the insurance company provides.
which they add in to the price of the annuity.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
hvaclorax
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Re: Is an SPIA a good way now to lock in high short term rates for the long term?

Post by hvaclorax »

Glad to see the above answers. I too have an interest in this issue. Layperson question. Now I better understand. I like the idea of buying long bonds. Thanks OP
Northern Flicker
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Re: Is an SPIA a good way now to lock in high short term rates for the long term?

Post by Northern Flicker »

For perspective, a 19-yr ladder of equal-sized zero coupon treasury strips has a duration of about 10. That would also be the approximate duration of a SPIA purchased when one's life expectancy is 19 years.
000
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Re: Is an SPIA a good way now to lock in high short term rates for the long term?

Post by 000 »

If there is no concern of leaving assets to an inheritance and there is no concern about liquidity or inflation and the SPIA rate quote you get is better than the long term bond you can buy, then the answer would seem to be yes.
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