An Annuity Hater Revisits SPIAs
I take a lot of flak when I write about annuities. That criticism has come from the insurance industry, because I have been highly critical of products like fee-laden variable annuities with complex menus of riders. But recent discussions and a new analysis have led me to reconsider single-premium immediate annuities (SPIAs) as a source of longevity insurance at a reasonable cost.
Despite the simplicity and low cost of the SPIA, I have not recommended them. But the amount of push back I received from people I respect, such as Wade Pfau of the American College and Joe Tomlinson, actuary and former financial planner, has persuaded me to take another look. I discussed the subject with both of them.
A SPIA provides longevity insurance via mortality pooling – those who live short lives subsidize those who live longer ones. I also agree with Pfau and Tomlinson that it can dampen stock market sequence of returns risks. Reducing sequence risk, however, can also be accomplished with other fixed-income investments such as laddered bond portfolios.
I’ll look at the mortality-adjusted returns from a SPIA and compare them to corporate and Treasury bond ladders. I’ll then look at an important risk – inflation – and then step back to assess the pros and cons of SPIAs.
Calculations of expected returns
I went to ImmediateAnnuities.com and got a quote for a 65-year old male. I took the highest payout for a life-only option to be most fair to the product. Reducing payouts with options like life with a period certain or life with cash refund lowers the monthly payment and is counterproductive – insuring for both a very long and very short life. I’m assuming the actuaries would also price other ages and joint annuities based on life expectancy tables so this would be representative.