Vanguard Diehards

Re: Why postpone purchase of life annuity?

Bobcat2 — Tue, 08 Apr 2008 12:37:37 GMT

The pertinent decision on whether to buy an inflation-indexed lifetime annuity at any age in retirement should be based on the spread between the income payout rate on the real annuity vs. a safe withdrawal rate from your retirement portfolio. It should not be based on what you 'forecast' the payout rate to be at a later age.

For example, at age 65 you might be able to get a real annuity that pays out 6% per year vs. a portfolio SWR of 4% per year. If a 50% higher guaranteed real lifetime payout on a portion of your portfolio sounds like a good deal, you should partially annuitize at age 65; otherwise don't partially annuitize.

The paper by Milevsky that Taylor referenced was written in 1996, long before the advent of real annuities in 2004. So somewhat understandably Milevsky in the paper doesn't even consider the possibility of real annuities in his analysis. As Bob U has pointed out, even Milesky has changed his tune since then. Most academics specializing in retirement research advocate the use of real annuities, not nominal annuities, to hedge not only longevity risk, but also inflation risk in retirement.

Bob K

Re: Why postpone purchase of life annuity?

uphaus — Tue, 08 Apr 2008 10:38:30 GMT

Since Milevksy, for good reason, has been brought up by Taylor, it may be of interest to see how Milevsky (and Chen) approach the use of annuities within the larger framework of asset allocation.

Here's a link to a fascinating paper published in 2003. (Warning: it's not a quick read!) http://www.fpanet.org/journal/articles/2003_Issues/jfp0603-art7.cfm

Bob U.

Re: Why postpone purchase of life annuity?

Taylor Larimore — Tue, 08 Apr 2008 02:03:23 GMT

Hi Dean:

"Taylor, tell me about the 70 year old breakpoint."

I'm not sure 70 years old is the exact "breakpoint" for purchasing a lifetime annuity, but there are good reasons for waiting as long as reasonably possible.

For example, according to Vanguard, a male age 65 who invests $100,000 can get an annual guaranteed lifetime income of $8,380 (8.3%); at age 75 it is $10,650 (10.7%); at age 85 it is $13,417 (13.4%).

By waiting, inflation is less of a factor.

By waiting, you may not be alive and not even need the annuity.

By waiting, you may be in poor health and not benefit from a lifetime annuity.

Professor Milevsky of York University is an expert on annuities who has done many studies. One of these is titled, "Optimal Asset Allocation Towards the End of the Life Cycle: To Annuitize or Not to Annuitize?" This is a portion of the Abstract:

"Given the empirical evidence on the cost structure of annuities, the adverse selection implicit in annuity mortality tables together with the long- run propensity for equities to outperform fixed income investments, otherwise known as time-diversification, it makes very little sense for consumers under the age of 80 to annuitize any additional marketable wealth. In essence, the rate of return from a life annuity can easily be "beaten" using alternative investment assets. The exception to this rule is the event in which (mean reverting) interest rates are extraordinarily high or when consumers have private (asymmetric) health information that would lead them to believe that they are much healthier than average, both of which rarely occur."

You can read the complete study here:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1077

I hope I have answered your question

Best wishes.
Taylor

Re: Good deal??

DeanCC — Tue, 08 Apr 2008 00:23:52 GMT

Taylor, tell me about the 70 year old breakpoint.....

Re: Good deal??

tar42 — Tue, 08 Apr 2008 00:13:37 GMT

I wish M* would drop the little +/- box. Mel doesn't deserve a neg(-) for a honest answer.

Tim

Re: Vanguard liletime income annuity experience

Mel Lindauer — Mon, 07 Apr 2008 23:24:22 GMT

uphaus:

I just nudged you up 1, Mel. You're up on me 1-zip! :-) Bob U.
Edit: Just occurred to me that we could pretend we're playing golf. Bring on the birdies and eagles!

Here's a +1 back atcha! :-)

Best regards,

Mel

Re: Vanguard liletime income annuity experience

uphaus — Mon, 07 Apr 2008 21:25:47 GMT

I just nudged you up 1, Mel. You're up on me 1-zip! :-) Bob U.

Edit: Just occurred to me that we could pretend we're playing golf. Bring on the birdies and eagles!

Re: Vanguard liletime income annuity experience

Mel Lindauer — Mon, 07 Apr 2008 20:25:43 GMT

Hi Again Bob:

Should we both feel bad about our -1 ratings?

Best regards,

Mel

Re: Vanguard liletime income annuity experience

uphaus — Mon, 07 Apr 2008 20:19:47 GMT

Hi Mel,

I think that's a question I might ask a wealth adviser, but it may be an invitation to trouble! :-)

Thank you for the correction, which I've made.

Mortality yours, Bob U.

Re: Vanguard liletime income annuity experience

Mel Lindauer — Mon, 07 Apr 2008 18:55:13 GMT

uphaus:
You may know that one unusual (and beneficial) feature of at least the pre-tax annuities is that they are participating annuities, which means, basically, that they guarantee principal, minimum investment return payments, and possible supplements to payments depending on investment, morality, and expense experience. If you have a contract similar to mine, this information should be spelled out.

Hi Bob:

Do moral investors get more than immoral ones? :-)

Regards,

Mel

Re: Good deal??

retired at 48 — Mon, 07 Apr 2008 18:53:54 GMT

To: All response posters: Thanks for a 100% "civil" posting thread! R48

Re: Vanguard liletime income annuity experience

uphaus — Mon, 07 Apr 2008 17:30:30 GMT

Note to JimD71--

This note is to inform, not alarm, you. I have two annuities with TIAA-CREF, both based on pre-tax monies. It's not clear to me whether your annuity with TIAA-CREF is pre-tax or after-tax but here's a bit of info you should be aware of, or you can get clarification with TIAA itself.

First, TIAA does not participate with the state guarantee associations--at least not the pre-tax annuities. There was a quite lengthy discussion of this matter at the following link. http://www.diehards.org/forum/viewtopic.php?t=6058&highlight=tiaa

I have put the question directly to my Wealth Management team at TIAA and the answer has been that TIAA alone guarantees its annuities (at least the pre-tax ones). Why not put the question directly to your TIAA representative?

I'm also interested to hear you say that your TIAA fixed immediate annuity can go up but not down. You may know that one unusual (and beneficial) feature of at least the pre-tax annuities is that they are participating annuities, which means, basically, that they guarantee principal, minimum investment return payments, and possible supplements to payments depending on investment, mortality, and expense experience. If you have a contract similar to mine, this information should be spelled out.

However, at least for my pre-tax fixed immediate annuity, there is a provision in the contract that distinguishes between the guaranteed payment and the supplements (e.g., additional income). The possibility of the supplement being reduced is clearly spelled out, though my experience in nearly 8 years is that the supplement has been raised modestly about half the time.

Whatever the case, I suggest you review the language of your contract quite carefully and call TIAA, if you have questions, and get the answers in writing. Again, I'm quite happy with my TIAA fixed immediate annuity, but you need to know exactly what you own. Best wishes, Bob U.

Note for the historical archive: Bob U. edited the original "morality" to "mortality."

Re: Vanguard liletime income annuity experience

Mel Lindauer — Mon, 07 Apr 2008 14:35:33 GMT

linlew:
Thank you for your comment,suggestion, and advise. Answer me this question?? what investment instrument guarantees to match or keep up with inflation on the original investment. every investment is a gamble and one is hoping to keep even, if im incorect let me know. Thank you, once again-linlew

Hi linlew:

TIPS (Treasury Inflation Protected Securities) guarantee a real return over and above inflation. I Bonds also offer a fixed return over and above inflation for up to 30 years. Both are issued by the US Treasury.

Regards,

Mel

Re: Good deal??

EmergDoc — Mon, 07 Apr 2008 13:38:31 GMT

Immediate annuities are the "term insurance" (AKA the transparent, competitive, and generally appropriate version) of annuities. The more bells and whistles you add on, the less transparent and competitive the products become and the more difficult they become for joe consumer to evaluate. At a certain level of complexity, even the experts can't make comparisons.

The only additional things I would consider paying for would be a COLA adjustment and payments for a surviving spouse.

Delayed annuities suffer from the same issues as permanent life insurance. Money back schemes or guaranteed payouts for 15 years or whatever just lower your monthly payment and make the product less transparent. If you want some money back, don't annuitize it all and invest the stuff you don't annuitize yourself. If you want guaranteed payments for your heirs, perhaps you're better off not annuitizing it all so you can be sure to leave something behind.

Re: Vanguard liletime income annuity experience

linlew — Mon, 07 Apr 2008 13:15:09 GMT

Thank you for your comment,suggestion, and advise. Answer me this question?? what investment instrument guarantees to match or keep up with inflation on the original investment. every investment is a gamble and one is hoping to keep even, if im incorect let me know. Thank you, once again-linlew