Author Topic: Single Premium Immediate Annuities for Early Retirees  (Read 8479 times)

climber1

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Single Premium Immediate Annuities for Early Retirees
« on: May 02, 2015, 03:40:07 PM »
I learned about Single Premium Immediate Annuities (SPIA) today and they seem like the ideal insurance against longevity risk. In case any of you are not familiar with them, you pay a premium up front and then receive a monthly payment until death (they are available as both fixed and inflation-adjusted). When you die, the money stops. There is no return of the premium. (So if you get hit by a truck the day after purchasing the annuity, you get nothing). This could be a downside for those who want to leave money to others, but isn't a problem for me as I have no dependents. The potential benefit of a SPIA compared to holding an investment portfolio is a higher equivalent SWR since those who live longer are subsidized by those who die early. In any case, the rates on SPIA set a minimum on the SWR for your age/gender which I find interesting.

Unfortunately, I was having a hard time finding rates for SPIA at ages below 50 and only one website that goes down to 40. Anyone know where I can find a quote for lower ages? Even if I wasn't going to buy one, it is valuable information for understanding what is a SWR.

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Re: Single Premium Immediate Annuities for Early Retirees
« Reply #1 on: May 02, 2015, 04:03:13 PM »
These are getting really popular as a supplementary investment, or emergency backup, as you say for longevity insurance.  They could also be insurance for a market meltdown or an unexpected crisis such as a major health disaster or a lawsuit.  Too many people are financially ruined by cancer (even with insurance) or smashing their car into someone else and inflicting a permanent disability.

I also like how, instead of EVERYONE having to save for the P90 case and 90% of us dying with too much money, with the pooled risk everyone can save/pay less and spend more.  This has to be the future of personal retirement.

Dodge

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Re: Single Premium Immediate Annuities for Early Retirees
« Reply #2 on: May 02, 2015, 04:17:19 PM »
From what I remember the last time I researched this, SPIAs are bad for someone retiring early, because only the ones which don't grow with inflation are good deals, but only over a relatively shorter period (say 20-30 years).  The SPIAs which do grow with inflation are too bogged down by fees, as the annuity company has more risk, and must protect themselves in the case of runaway inflation.

Also, since (as you mentioned) you're partly subsidized by the people who die early, the rates aren't as favorable for the early retiree.  So it might be worth it to buy one when you turn 60, but not when you're 40.

beltim

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Re: Single Premium Immediate Annuities for Early Retirees
« Reply #3 on: May 02, 2015, 04:28:22 PM »
I also like how, instead of EVERYONE having to save for the P90 case and 90% of us dying with too much money, with the pooled risk everyone can save/pay less and spend more.  This has to be the future of personal retirement.

This is a really good point.  It's how pension funds can have a 7 or 8% effective "withdrawal rate" because if they have a sufficient number of people, they only have to plan for the 50th percentile case.

wtjbatman

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Re: Single Premium Immediate Annuities for Early Retirees
« Reply #4 on: May 03, 2015, 08:01:33 AM »
Also, since (as you mentioned) you're partly subsidized by the people who die early, the rates aren't as favorable for the early retiree.  So it might be worth it to buy one when you turn 60, but not when you're 40.

I'd say that's pretty much spot on. Retire early and purchase a SPIA? Not unless you're a boglehead and think 60 is "early".

climber1

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Re: Single Premium Immediate Annuities for Early Retirees
« Reply #5 on: May 03, 2015, 11:25:46 AM »
These are getting really popular as a supplementary investment, or emergency backup, as you say for longevity insurance.  They could also be insurance for a market meltdown or an unexpected crisis such as a major health disaster or a lawsuit.  Too many people are financially ruined by cancer (even with insurance) or smashing their car into someone else and inflicting a permanent disability.

I don't think they actually help with some of the situations you propose. With a SPIA, you always get the same payment every month. There is no way to get back any part of your original principal. So if you have a crisis which requires a large amount of money quickly, an annuity wouldn't be any help. Also, if there is a total market meltdown, the annuity could be worthless if the insurance company goes bankrupt (remember, they invest your premium in the market). Although they do probably provide decent security against your more run-of-the-mill 40% drop in equities.

From what I remember the last time I researched this, SPIAs are bad for someone retiring early, because only the ones which don't grow with inflation are good deals, but only over a relatively shorter period (say 20-30 years).  The SPIAs which do grow with inflation are too bogged down by fees, as the annuity company has more risk, and must protect themselves in the case of runaway inflation.

Also, since (as you mentioned) you're partly subsidized by the people who die early, the rates aren't as favorable for the early retiree.  So it might be worth it to buy one when you turn 60, but not when you're 40.

If you could link me to your sources for this information, that would be much appreciated. I like to run the numbers myself.

Also, since (as you mentioned) you're partly subsidized by the people who die early, the rates aren't as favorable for the early retiree.  So it might be worth it to buy one when you turn 60, but not when you're 40.

I'd say that's pretty much spot on. Retire early and purchase a SPIA? Not unless you're a boglehead and think 60 is "early".

No, 60 is very, very late. I am aiming for 30. And as I said, I am not about to run out and buy a SPIA. However, quotes for a SPIA would tell me what the insurance industry thinks is a reasonable SWR in the average longevity scenario. This would be useful as I am not sure I trust the 4% rule for a 50 year retirement.


oldladystache

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Re: Single Premium Immediate Annuities for Early Retirees
« Reply #6 on: May 03, 2015, 11:29:23 AM »
https://www.immediateannuities.com/

But that's only a safe rate if you intend to die at the average time. Half of us won't.

pbkmaine

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Re: Single Premium Immediate Annuities for Early Retirees
« Reply #7 on: May 03, 2015, 12:03:44 PM »
http://money.cnn.com/retirement/guide/annuities_longevity.moneymag/index.htm

For longevity, look into deferred annuities as above.

climber1

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Re: Single Premium Immediate Annuities for Early Retirees
« Reply #8 on: May 03, 2015, 01:17:54 PM »
http://money.cnn.com/retirement/guide/annuities_longevity.moneymag/index.htm

For longevity, look into deferred annuities as above.

Thanks for the information! This seems like it probably would match my risk profile better. I am willing to accept market risk (and also the risk that my age cohort lives longer or shorter than currently expected), but do not want to be exposed to the idiosyncratic risk of my own life expectancy. By hedging this risk, I should be able to move my retirement date sooner by only needing to plan for the average rather than 90th of 95th percentile.

In case anyone is interested, I did find inflation-adjusted SPIA quotes through Vanguard. I ran a number of quotes to find what is the minimum age at which the annual payment is 4% of the premium. Basically, at what age can you get a guaranteed 4% WR from a SPIA. For men, it is age 60 and for women, it is 62. So, it looks like the 4% rule is definitely safe for the average retiree.

On the other hand, for a 36 year old male, the quote was equivalent to a 2.24% WR. Not good enough in my mind.

foobar

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Re: Single Premium Immediate Annuities for Early Retirees
« Reply #9 on: May 05, 2015, 02:03:54 PM »
From what I remember the last time I researched this, SPIAs are bad for someone retiring early, because only the ones which don't grow with inflation are good deals, but only over a relatively shorter period (say 20-30 years).  The SPIAs which do grow with inflation are too bogged down by fees, as the annuity company has more risk, and must protect themselves in the case of runaway inflation.

Also, since (as you mentioned) you're partly subsidized by the people who die early, the rates aren't as favorable for the early retiree.  So it might be worth it to buy one when you turn 60, but not when you're 40.

It isn't so much that the inflation adjusted ones are bad deals. It is more that inflation protection is really expensive.

Without mortality credits SPIAs are going to give you returns on the same order as long term bonds. For example today a 40 year old male gets 4.46%. Buy some long term bonds (yield in the 3-4% range depending on your blend of corps and treasuries. Remember you can get 3.5% on EE bonds) and your money will last 40-50 years. The annuity company can tend to give slightly higher rates since they are able to keep the average maturity higher than you can but it isn't by much.

In the end for the 4% rule to work over 40+ year time periods, you are going to need to hold 60%+ in stocks and take on the risks involved with that. There is no real way around it. All the insurance products out there (variable annuities with floors on losses) cost too much (for good reason) and would reduce your SWR.  Towards the end (70+), things like SPIA and the like make sense for a certain subset of people.

Dodge

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Re: Single Premium Immediate Annuities for Early Retirees
« Reply #10 on: May 05, 2015, 02:07:53 PM »
From what I remember the last time I researched this, SPIAs are bad for someone retiring early, because only the ones which don't grow with inflation are good deals, but only over a relatively shorter period (say 20-30 years).  The SPIAs which do grow with inflation are too bogged down by fees, as the annuity company has more risk, and must protect themselves in the case of runaway inflation.

Also, since (as you mentioned) you're partly subsidized by the people who die early, the rates aren't as favorable for the early retiree.  So it might be worth it to buy one when you turn 60, but not when you're 40.

It isn't so much that the inflation adjusted ones are bad deals. It is more that inflation protection is really expensive.

Specifically, the issue I was referring to revolves around competition.  If I remember the story correctly, apparently each company calculates inflation differently, which makes it almost impossible to compare their offerings.  When you can't compare their offerings, they get away with over-charging you.  This is why simple SPIAs with no inflation adjustment are the best deal.  The competition results in the company having lower margins on these products, giving us a better payout.

foobar

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Re: Single Premium Immediate Annuities for Early Retirees
« Reply #11 on: May 05, 2015, 07:58:28 PM »
From what I remember the last time I researched this, SPIAs are bad for someone retiring early, because only the ones which don't grow with inflation are good deals, but only over a relatively shorter period (say 20-30 years).  The SPIAs which do grow with inflation are too bogged down by fees, as the annuity company has more risk, and must protect themselves in the case of runaway inflation.

Also, since (as you mentioned) you're partly subsidized by the people who die early, the rates aren't as favorable for the early retiree.  So it might be worth it to buy one when you turn 60, but not when you're 40.

It isn't so much that the inflation adjusted ones are bad deals. It is more that inflation protection is really expensive.

Specifically, the issue I was referring to revolves around competition.  If I remember the story correctly, apparently each company calculates inflation differently, which makes it almost impossible to compare their offerings.  When you can't compare their offerings, they get away with over-charging you.  This is why simple SPIAs with no inflation adjustment are the best deal.  The competition results in the company having lower margins on these products, giving us a better payout.

There are 2 issues that come up when people talk about inflation adjusted SPIAs being a bad deal.

1) The break even point is like 30 years with todays inflation rates (exact number bounces around a bit) compared to the normal SPIA.  That is way too long for most people (i.e. most of those 60 year olds plan on being dead:)). That  makes for a tough product to market (Do you wants 4.5% inflation adjusted or 7% fixed). But this is sort of expected. If we had a 1970-1980 inflation period that time period would drop a ton. You are giving up return  (on average) to hedge against the worst case.

2) The spread between the investment returns and the payouts is a bit higher (.3-.5%). Is that a result of less competition? Maybe. But it is also partly because the investments are much more expensive (you don't just buy corporate bonds. You end up doing a bunch of interest rate swaps and the like.

SPIAs of either type really need mortality credits for them to work out. Until you are in your late 60s they really don't help. The one exception might be if you did something like a 20 year term annuity (lets say you wanted to bridge from retirement to SS), you might be able to get a benefit of getting long term bond rates that you couldn't get on your own.  You would have to get some quotes to see if you get enough of a benefit from that to cover paying off the insurance company.

innerscorecard

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Re: Single Premium Immediate Annuities for Early Retirees
« Reply #12 on: May 05, 2015, 08:55:25 PM »
If you do this, you are exchanging market price risk for single-counterparty risk.

foobar

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Re: Single Premium Immediate Annuities for Early Retirees
« Reply #13 on: May 06, 2015, 09:21:29 AM »
If you do this, you are exchanging market price risk for single-counterparty risk.

I think most of the annuity companies have insurance but yeah it is a risk. And to some extent buy from different companies doesn't help. An event that takes out 1 annuity issuer has a large probability of taking them all out.

Wolf359

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Re: Single Premium Immediate Annuities for Early Retirees
« Reply #14 on: May 06, 2015, 02:55:55 PM »
Thinking of it as longevity insurance may work, but using a SPIA as part of a core steady income stream isn't as effective.

Part of the problem is that SPIAs are really expensive right now because interest rates are low.  I wouldn't sign up for one until rates were higher. 

Using it for longevity insurance means I'd look into the deferred SPIA.  Maybe if I remember when I'm 60-65 I'll sign up for a deferred annuity to kick in when I'm 75.  If I live that long, I might be running out of money by then.

I'm also thinking of Social Security as a form of longevity insurance.  I'm not sure it will be there or what shape it will be in by the time I hit 70, but if I delay taking it as long as possible it might give me something.  At least that won't cost anything additional out of pocket, and will be indexed to inflation.  I'm certainly not relying on it for core income.

SPIAs are not as effective as a good stock/bond portfolio that's adequately funded.  Annuities should only be used if your portfolio is underfunded, and you've run out of time to fund it (hit retirement age and can't get another job, or got disabled.)  Use 3% as a SWR for greater than 30 year retirements. At least if you use a reasonable equity portfolio, the equities will increase with inflation. 

Also read stories and day-to-day accounts of the 2008 crash.  Some of the companies central to it were the highest rated insurance companies.  In some investment books dated 2007 or earlier, there's a lot of recommendations to go with AIG for annuity and insurance needs, because they were a "financial fortress."  Ha!  Makes you rethink wanting to rely on one for an annuity. 

beltim

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Re: Single Premium Immediate Annuities for Early Retirees
« Reply #15 on: May 06, 2015, 02:59:41 PM »
SPIAs are not as effective as a good stock/bond portfolio that's adequately funded.  Annuities should only be used if your portfolio is underfunded, and you've run out of time to fund it (hit retirement age and can't get another job, or got disabled.)  Use 3% as a SWR for greater than 30 year retirements. At least if you use a reasonable equity portfolio, the equities will increase with inflation. 

I don't understand your point here.  If a diversified portfolio including equities has higher returns (it does), how can annuities help you out if your portfolio is underfunded?  For a given level of safety, the diversified portfolio should always allow a higher withdrawal percentage (longevity annuities excluded).

foobar

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Re: Single Premium Immediate Annuities for Early Retirees
« Reply #16 on: May 07, 2015, 06:56:02 AM »
SPIAs are not as effective as a good stock/bond portfolio that's adequately funded.  Annuities should only be used if your portfolio is underfunded, and you've run out of time to fund it (hit retirement age and can't get another job, or got disabled.)  Use 3% as a SWR for greater than 30 year retirements. At least if you use a reasonable equity portfolio, the equities will increase with inflation. 

I don't understand your point here.  If a diversified portfolio including equities has higher returns (it does), how can annuities help you out if your portfolio is underfunded?  For a given level of safety, the diversified portfolio should always allow a higher withdrawal percentage (longevity annuities excluded).

Diversified portfolios may or may not have a higher return. Yes on average they will do much better. But for your specific case, they may or may not. Annuitites tend to make the worst case better at the cost of making the average case worse.  Also after 65 or so the effect of mortality credits is high enough to potentially give you higher returns.

Wolf359

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Re: Single Premium Immediate Annuities for Early Retirees
« Reply #17 on: May 07, 2015, 11:27:14 AM »
SPIAs are not as effective as a good stock/bond portfolio that's adequately funded.  Annuities should only be used if your portfolio is underfunded, and you've run out of time to fund it (hit retirement age and can't get another job, or got disabled.)  Use 3% as a SWR for greater than 30 year retirements. At least if you use a reasonable equity portfolio, the equities will increase with inflation. 

I don't understand your point here.  If a diversified portfolio including equities has higher returns (it does), how can annuities help you out if your portfolio is underfunded?  For a given level of safety, the diversified portfolio should always allow a higher withdrawal percentage (longevity annuities excluded).

If you're facing retirement with an underfunded or marginally funded portfolio, there's the risk that your portfolio will fail (run out of money).  If you annuitize the balance instead, then you're at least guaranteeing the income stream for life (it might not be as high as you want, but you won't outlive it).  It's the classic case for longevity insurance -- if your portfolio is marginal, adding 20 years of lifespan may cause it to fail.  If you lower your SWR to account for potential long life, it may be too low to live on.  An annuity may provide a better income stream in that case.  The guy who dies next year loses, but his annuity goes on to fund those who live longer.  It leaves nothing for the heirs, but you don't outlive your income.   

arebelspy

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Re: Single Premium Immediate Annuities for Early Retirees
« Reply #18 on: May 07, 2015, 11:42:28 AM »
A SPIA is the only annuity I'd consider okay for an ER. 

They're most useful, IMO, for annuitizing a portion of your portfolio to create a spending "floor."  Pfau talks about this a fair amount.

I'm still not a fan of it today in the current interest environment we're in, but there is a use case for it.
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beltim

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Re: Single Premium Immediate Annuities for Early Retirees
« Reply #19 on: May 07, 2015, 12:13:50 PM »
SPIAs are not as effective as a good stock/bond portfolio that's adequately funded.  Annuities should only be used if your portfolio is underfunded, and you've run out of time to fund it (hit retirement age and can't get another job, or got disabled.)  Use 3% as a SWR for greater than 30 year retirements. At least if you use a reasonable equity portfolio, the equities will increase with inflation. 

I don't understand your point here.  If a diversified portfolio including equities has higher returns (it does), how can annuities help you out if your portfolio is underfunded?  For a given level of safety, the diversified portfolio should always allow a higher withdrawal percentage (longevity annuities excluded).

Diversified portfolios may or may not have a higher return. Yes on average they will do much better. But for your specific case, they may or may not. Annuitites tend to make the worst case better at the cost of making the average case worse.  Also after 65 or so the effect of mortality credits is high enough to potentially give you higher returns.

That's a really good point.  Thanks!

SpareChange

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Re: Single Premium Immediate Annuities for Early Retirees
« Reply #20 on: May 08, 2015, 12:10:01 AM »
They are rarely used, but there are also variable SPIAs that might make sense in certain situations. Vanguard does /did offer them, and there used to be a great online quote generator linked through their website, but I can't seem to find it anymore. I'd consider it in my case if SS isn't quite enough and my portfolio is iffy at that point (70), or maybe if I'm afraid my mind is about to go haha. 

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Re: Single Premium Immediate Annuities for Early Retirees
« Reply #21 on: May 08, 2015, 12:29:56 AM »
Vanguard does /did offer them, and there used to be a great online quote generator linked through their website, but I can't seem to find it anymore.
Is it https://investor.vanguard.com/annuity/guaranteed-income?  One path from that page takes you to https://www.incomesolutions.com/HomePage.aspx.

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Shane

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Re: Single Premium Immediate Annuities for Early Retirees
« Reply #23 on: May 08, 2015, 04:27:24 AM »
In his book Die Broke Stephen Pollan recommends converting your retirement stash into SPIAs incrementally, as you get older and as you need them.

For example, say you need $5000/month to meet living expenses. You make more than that at your job, so you've built up a nice stash over the years. At some point you decide to semi-retire and cut back your work to part time, which will reduce your income to, say, $4000/month. That means you need an extra 1000 bucks a month to meet expenses, so you buy an annuity that'll pay you $1000/month for life.

Later on, say you decide to completely retire, so you need another $4000/month to meet your living expenses. Then you go to your annuity company and buy another annuity that'll pay you $4000/month.

As you get older, inflation starts eating away at your income, and eventually, say you need $6000/month to maintain the same standard of living you used to get from $5K. So, you go back to your annuity company and purchase another annuity that'll pay you another $1000/month.

Each time you purchase an annuity you're a little bit older and therefore get a better deal than you did on the previous one. Purchasing the annuities incrementally over the course of years or decades allows you to buy the fixed rate annuities (non-inflation protected) which are generally a better deal because there's less risk for the company selling the annuity.

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Re: Single Premium Immediate Annuities for Early Retirees
« Reply #24 on: May 08, 2015, 08:48:33 AM »
I've looked into SPIA and you are definitely better off waiting, especially if you worry about longevity.  At ER ages, you are tying up too much capital and locking in '20 - 30 year bond-like' returns at best, and have a large risk of underperforming.  Basically, you are betting against the house, and if you happen to win (the house does even worse than a 'risk free return'), then the house will probably go bankrupt and not be able to give you all of your money back. 

But, in your 60's and beyond, if you are still spry and wealthy, you can start to leverage that valuable longevity to get the benefits of a larger pool of resources...  And, as ARS mentioned, if interest rates go back up in the meantime, things get a lot more interesting...

climber1

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Re: Single Premium Immediate Annuities for Early Retirees
« Reply #25 on: May 08, 2015, 11:27:03 PM »
Thanks everyone for the responses. They have helped to clarify the details of a SPIA. A SPIA has some nice features, but other detractors which make it not appropriate for me. Let me explain the financial product that I am looking for. I don't know if this exists or not. If it does, hopefully one of you will tell me.

Imagine 10,000 people all the same age as me who each have retirement savings of $500,000. Each of them wants to retire now and based on their spending level and expected market returns, this is enough to support them if they live for their expected lifespan. However, if they are lucky and live to 105, they will run out of money. All of them put their money (a total of $5 billion) into a trust which invests the money in some combination of VTSAX, VTIAX, VBTLX, and VTABX. Note that they are exposed to market risk. There is no insurance company involved. Then, each of them receives a payment monthly for the rest of their life (but nothing left for their heirs). This payment is based on the expected life expectancy of the individuals still alive and expected market returns. The trust should be fully depleted at the death of the last member.

In this manner, the individuals are still exposed to market risk. Additionally, if the whole cohort of 10,000 lives longer than initially expected (i.e. medicine causes a 10 year increase in life expectancy), then they are at risk. However, they are insured against their individual life expectancy. So they only need to save enough for median life expectancy rather than 95% percentile.

Also, note that there is no insurance company involved causing counterparty risk or taking a nice fee off the top. Instead, the design is a mutual, each member is insured by the others in their age cohort.

SpareChange

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Re: Single Premium Immediate Annuities for Early Retirees
« Reply #26 on: May 09, 2015, 12:37:53 AM »
Is it https://investor.vanguard.com/annuity/guaranteed-income?  One path from that page takes you to https://www.incomesolutions.com/HomePage.aspx.

Thank you very much for searching, but no, that is not it. After looking again, I was able to find a recent Bogleheads thread that said they are no longer offered. These are true SPIAs, but unlike their fixed brethren, you choose a mix of investment subaccounts (just like with deferred variables) for your premium, as well as an assumed interest rate (Vanguard's options were 3.5% or 5%). Your payment would vary based on these factors, as well as the mortality credits. I think this is still an option when you annuitise a Vanguard deferred variable annuity, although the terms are slightly different as it's underwritten by a different insurance company.

http://www.bogleheads.org/wiki/Vanguard_Lifetime_Income_Program_-_SPIA
http://www.bogleheads.org/wiki/Immediate_variable_annuity