Fixed Dollar SPIAs vs. Fixed Rate Cola SPIAs

In our last post, we asked whether now (or actually earlier this month) might be a good time to purchase a single premium immediate annuity (SPIA) to strengthen Floor Portfolios used to fund essential expenses. In that post (and prior posts) we focused on SPIAs that provide fixed dollar payments each month for life. In this post, we will discuss SPIAs that provide lifetime payments with annual fixed rate “cost of living adjustment” (or Cola) increases, and why you might want to consider this type of annuity rather than a fixed dollar SPIA to strengthen your Floor Portfolio. We include an example.

Is It a Good Time to Buy That Single Premium Immediate Life Annuity, Updated

In prior posts, we discussed possible assumptions used by life insurance company actuaries in pricing single premium immediate life annuities (SPIAs). In those posts, we provided implied discount rates consistent with quotes obtained from ImmediateAnnuities.com under two different mortality assumptions:

• based on life expectancy, or 50% probability of survival, and
• based on a 25% probability of survival, which is the longer expected lifetime basis we recommend using in our website for planning purposes.

In this post, we will again examine the implied interest rate assumptions built into recent quotes from ImmediateAnnuities.com and compare the quotes and the implied interest rates with the results of the similar exercise we performed and summarized in our post of September 17, 2023. We will also discuss a few other considerations that may affect your decision to buy a SPIA at this time.

Estimating Present Values of Long-Term Care Costs and Survivor Benefits Payable After the First Death Within a Couple

The Actuarial Approach recommended in this website involves periodically (generally annually) comparing the present value of a retired household’s assets with the present value of its anticipated household spending liabilities to develop its Funded Status as of a valuation date (generally the beginning of the current year). The present value of assets used in this comparison is the current market value of accumulated savings plus discounted values of future lump sum payments or streams of payments from other income sources. The present value of household spending liabilities is the discounted value of future lump sum expenses or streams of expenses. To help retired households allocate their assets between risky (Upside Portfolio) and non-risky (Floor Portfolio) investments, separate rates (investment return assumptions) are used to discount future essential expenses/non-risky asset sources and future discretionary expenses/risky asset sources.