Is An SPIA Considered Part Of Fixed Allocation In Asset Allo
Is An SPIA Considered Part Of Fixed Allocation In Asset Allo
Is an SPIA (or at least the balance on the annual statement issued by the insurance company) considered part of the fixed income portion of a portfolio when calculating percentages of assets?
Re: Is An SPIA Considered Part Of Fixed Allocation In Asset
I wouldn't consider it part of the portfolio at all. The money is gone. It won't ever come back. It has been replaced by an income stream which reduces the need to draw from your portfolio.Munir wrote:Is an SPIA (or at least the balance on the annual statement issued by the insurance company) considered part of the fixed income portion of a portfolio when calculating percentages of assets?
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Re: Is An SPIA Considered Part Of Fixed Allocation In Asset
There's no good answer to this. retiredjg's is as good as any, but it doesn't really answer the question of "what should I do when I buy as SPIA?"
If, let's say, you're $500,000 stocks/ $500,000 bonds, and you decided to buy a SPIA for $250,000, of your portfolio, after you've done that, what should the allocation of the unannuitized part be? Should it still be 50/50, i.e. $375,000 stocks, $375,000 bonds? Or should it be $500,000 stocks, $250,000 bonds?
Here's the problem. In terms of income stream and "risk," the annuity is rather like bonds. I would regard it as "frozen bonds," bonds that can no longer be transacted. That means that at the point when you buy the annuity, if you wish to keep your risk level constant, you should purchase the annuity by liquidating bonds, not by liquidating your portfolio proportionally.
On the other hand, and this is particularly relevant for "slice-and-dicers," an annuity is completely unlike bonds because it can no longer be deployed as an investing resource; it can't be bought, sold, or rebalanced.
Notice that an SPIA is different from, say, Social Security or so-called "human capital," because an SPIA is a voluntary purchase made at a particular point in time. For an SPIA, you have to answer the question "what assets should I liquidate?" For Social Security or "human capital," you do not.
If, let's say, you're $500,000 stocks/ $500,000 bonds, and you decided to buy a SPIA for $250,000, of your portfolio, after you've done that, what should the allocation of the unannuitized part be? Should it still be 50/50, i.e. $375,000 stocks, $375,000 bonds? Or should it be $500,000 stocks, $250,000 bonds?
Here's the problem. In terms of income stream and "risk," the annuity is rather like bonds. I would regard it as "frozen bonds," bonds that can no longer be transacted. That means that at the point when you buy the annuity, if you wish to keep your risk level constant, you should purchase the annuity by liquidating bonds, not by liquidating your portfolio proportionally.
On the other hand, and this is particularly relevant for "slice-and-dicers," an annuity is completely unlike bonds because it can no longer be deployed as an investing resource; it can't be bought, sold, or rebalanced.
Notice that an SPIA is different from, say, Social Security or so-called "human capital," because an SPIA is a voluntary purchase made at a particular point in time. For an SPIA, you have to answer the question "what assets should I liquidate?" For Social Security or "human capital," you do not.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Re: Is An SPIA Considered Part Of Fixed Allocation In Asset
I agree. SS, DB Pensions, SPIA and even a P/T retirement job serve to reduce income needs from your actual investment portfolio during retirement.tired wrote:I wouldn't consider it part of the portfolio at all. The money is gone. It won't ever come back. It has been replaced by an income stream which reduces the need to draw from your portfolio.Munir wrote:Is an SPIA (or at least the balance on the annual statement issued by the insurance company) considered part of the fixed income portion of a portfolio when calculating percentages of assets?
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Joe
Re: Is An SPIA Considered Part Of Fixed Allocation In Asset
I don't think its an either/or about taking from stocks and bonds. I think the operative question is, to what extent does the SPIA adjust my need/tolerance/ability to take risk?nisiprius wrote:There's no good answer to this. retiredjg's is as good as any, but it doesn't really answer the question of "what should I do when I buy as SPIA?"
If, let's say, you're $500,000 stocks/ $500,000 bonds, and you decided to buy a SPIA for $250,000, of your portfolio, after you've done that, what should the allocation of the unannuitized part be? Should it still be 50/50, i.e. $375,000 stocks, $375,000 bonds? Or should it be $500,000 stocks, $250,000 bonds?
Here's the problem. In terms of income stream and "risk," the annuity is rather like bonds. I would regard it as "frozen bonds," bonds that can no longer be transacted. That means that at the point when you buy the annuity, if you wish to keep your risk level constant, you should purchase the annuity by liquidating bonds, not by liquidating your portfolio proportionally.
On the other hand, and this is particularly relevant for "slice-and-dicers," an annuity is completely unlike bonds because it can no longer be deployed as an investing resource; it can't be bought, sold, or rebalanced.
Notice that an SPIA is different from, say, Social Security or so-called "human capital," because an SPIA is a voluntary purchase made at a particular point in time. For an SPIA, you have to answer the question "what assets should I liquidate?" For Social Security or "human capital," you do not.
If one chooses to take an SPIA, it is probably because assets are not enough to sustain a withdraw rate for the long term without risk of depletion. If one has enough assets such that one is close to the 4% SWR, then an SPIA might provide the margin of safety for one to invest the remaining assets aggressively. On the other hand, if one needs more retirement income and say is planning future SPIA purchases, then the risk of depletion/loss is high and the remaining funds should be invested conservatively to fund future SPIA purchases.
Re: Is An SPIA Considered Part Of Fixed Allocation In Asset
My "problem" is that I had been considering the SPIA residual value as calculated by the insurance company annually as part of my fixed income allocation, and detemined my equity allocation acordingly. When I recalculated my aset allocation and disregarded the SPIA, I find the my equity allocation is much higher because I've lowered the fixed income allocation by omitting the SPIA, and thus decreased the size of the whole pie. Based on the new calculations, that means I should be lowering my equity allocation which I find hard to do. Should I bite the bullet and just do it?
PS: As To Nisiprius's point, I do not remember where the money came from to purchase the two SPIAs I have. I think it was from the fixed income allotment, but is it really relevant now with the current dilemma I described above- or more accurately, what I see as a dilemma?
PS: As To Nisiprius's point, I do not remember where the money came from to purchase the two SPIAs I have. I think it was from the fixed income allotment, but is it really relevant now with the current dilemma I described above- or more accurately, what I see as a dilemma?
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Re: Is An SPIA Considered Part Of Fixed Allocation In Asset
I don't believe you should feel any compulsion to lower your equity allocation.Munir wrote:My "problem" is that I had been considering the SPIA residual value as calculated by the insurance company annually as part of my fixed income allocation, and detemined my equity allocation acordingly. When I recalculated my aset allocation and disregarded the SPIA, I find the my equity allocation is much higher because I've lowered the fixed income allocation by omitting the SPIA, and thus decreased the size of the whole pie. Based on the new calculations, that means I should be lowering my equity allocation which I find hard to do. Should I bite the bullet and just do it?
Broadly speaking: bonds
* provide a flow of interest that's steadier and higher than stock dividends (except recently!)
* don't fluctuate much in value compared to stocks.
Broad speaking, an SPIA
* provides a flow of payments that's even steadier and higher than bonds
* have a "value" that can be calculated, but isn't much use because SPIAs to all intents and purposes can't be sold
Let's assume an SPIA owner is in retirement and drawing income, and that they are basically spending pretty much what their total resources (portfolio + SPIA + Social Security + pension) can safety provide. (Because if this is not true, then it's not clear what the reason for buying the SPIA was, and they would probably have been better off foregoing it).
That means that one's risk concerns mostly have to do with the ability of the total resources to provide income.
To keep things simple let's forget Social Security and pensions, in part because one doesn't have much control over them--they are what they are and you use them to figure out how much income your other resources must provide. Let's say that counting SPIA at present value, one has 50% stocks, 25% bonds, 25% SPIA. I would say that as long as the portfolio is actually serving as a retirement income source--as opposed to being deployed for investment strategies, rebalancing, etc.--the SPIA is both less volatile and provides more more income than bonds. It therefore shoulders the same load or ore that bonds would shoulder. Therefore, I believe that if you can tolerate the risk of 50% stocks, 50% bonds, you can tolerate the risk of 50% stocks, 25% bonds, 25% SPIA and there's no need to reduce stock allocation.
A somewhat different way to think about it is that the remaining allocation becomes less important, because due to the SPIA income, the withdrawals that the stocks and bonds need to provide is smaller, and as withdrawal rates get smaller, the effect of asset allocation on safety gets smaller and smaller--in traditional SWR studies 3% is pretty safe regardless of allocation. So you are actually freer to adjust the remaining allocation either way according to taste
It's sort of important because that was really the decision point. If we regard an SPIA as "frozen bonds," that are comparable to bonds if one is in retirement and treating them as an income source, not as an investment deployment.PS: As To Nisiprius's point, I do not remember where the money came from to purchase the two SPIAs I have. I think it was from the fixed income allotment, but is it really relevant now with the current dilemma I described above- or more accurately, what I see as a dilemma?
Say you were 50/50/0 stocks/bonds/SPIA. In my view, if you liquidated bonds to buy the SPIA, to, say, 50/25/25, your overall risk situation didn't change much. If you liquidated the whole portfolio proportionately, to, say, 37.5/37.5/25, you considerably reduced your risk. So in trying to decide what to do now, you need to go back and ask "Which allocation is the one that matched my risk tolerance best? The original 50/50/0 or the lower-risk 37.5/37.5/25?
If you did the latter, you might say now, "well, it was just part of my glide slope, a step down in risk to prepare for retirement." And perhaps your reluctance to cut stocks further is because you recognize that you cut risk when you bought the SPIA.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Re: Is An SPIA Considered Part Of Fixed Allocation In Asset
Munir wrote:Is an SPIA (or at least the balance on the annual statement issued by the insurance company) considered part of the fixed income portion of a portfolio when calculating percentages of assets?
To answer the question (first quote), the SPIA is not part of the AA and it is an income stream.Munir wrote:My "problem" is that I had been considering the SPIA residual value as calculated by the insurance company annually as part of my fixed income allocation, and detemined my equity allocation acordingly. When I recalculated my aset allocation and disregarded the SPIA, I find the my equity allocation is much higher because I've lowered the fixed income allocation by omitting the SPIA, and thus decreased the size of the whole pie. Based on the new calculations, that means I should be lowering my equity allocation which I find hard to do. Should I bite the bullet and just do it?
- As with ALL income streams, they play a major role in determining ability and need for risk in the portfolio of remaining investable Assets.
- If you happen to include this SPIA in Fixed income, of course you are carrying a higher Equity risk in the portfolio that may (may not) correspond to the level of Equity risk that you NEED.
Landy |
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Re: Is An SPIA Considered Part Of Fixed Allocation In Asset
I agree with the theory behind what Nisi is saying. But there is another way to look at this that might affect you more than the theory. It depends on how you see things.nisiprius wrote:I don't believe you should feel any compulsion to lower your equity allocation.Munir wrote:My "problem" is that I had been considering the SPIA residual value as calculated by the insurance company annually as part of my fixed income allocation, and detemined my equity allocation acordingly. When I recalculated my aset allocation and disregarded the SPIA, I find the my equity allocation is much higher because I've lowered the fixed income allocation by omitting the SPIA, and thus decreased the size of the whole pie. Based on the new calculations, that means I should be lowering my equity allocation which I find hard to do. Should I bite the bullet and just do it?
If you had 50% stocks/50% bonds and bought an SPIA with bond money, you can think of your portfolio as 50% stocks/25% bonds/25% SPIA. In a market crash, you might be fine.
If you have 50% stocks/50% bonds and bought an SPIA with bonds money, you could also think of your portfolio as now 66% stocks/33% bonds. A market crash might seem much more devastating even though the situation is essentially the same.
I suspect that in a crash, more people will fall into the second group and see their portfolios as dwindling rather than remembering that portion of "frozen bonds" sitting off to the side (in which case the portfolio is only "slimming a bit", but will be fine in a few years).
The question is...how do you see it? That should determine whether you should add more bonds or not.
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Re: Is An SPIA Considered Part Of Fixed Allocation In Asset
Money that is committed to an SPIA would not be considered a bond. It's more like a pension. Unlike a bond, a pension benefit has no maturity date. They do, however, have a termination date. The cash flows end when you end (or your spouse dies), whenever that is, and the par value paid upon your termination is $0. Like a pension, SPIA's have no investment value once the beneficiaries die.
So, the question is, is a pension a bond? Here is an article I co-authored with Craig Israelsen about this topic, Is a Pension a Bond? Just substitute SPIA for pension. I believe the article gets to the heart of your question.
Rick Ferri
So, the question is, is a pension a bond? Here is an article I co-authored with Craig Israelsen about this topic, Is a Pension a Bond? Just substitute SPIA for pension. I believe the article gets to the heart of your question.
Rick Ferri
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.
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Re: Is An SPIA Considered Part Of Fixed Allocation In Asset
Rick:
I would like to ask a related question (without hijacking the thread)! I inherited stock in a privately held company. It is illiquid because there are no buyers and there are restrictions on who can buy the shares. It pays a 5% dividend and has been in business for 70 years.
I am considering it a "stock" even though I can't sell it or rebalance it. It has equity risk in the sense that the business can be affected by a market downturn. My question is, would you count this as stock, hybrid or a liability reducing asset like an SPIA?
Thanks in advance.
Roosevelt.
I would like to ask a related question (without hijacking the thread)! I inherited stock in a privately held company. It is illiquid because there are no buyers and there are restrictions on who can buy the shares. It pays a 5% dividend and has been in business for 70 years.
I am considering it a "stock" even though I can't sell it or rebalance it. It has equity risk in the sense that the business can be affected by a market downturn. My question is, would you count this as stock, hybrid or a liability reducing asset like an SPIA?
Thanks in advance.
Roosevelt.
Re: Is An SPIA Considered Part Of Fixed Allocation In Asset
This is what I don't understand in many of these types of discussions. Apparently, you have fixed on some magic number that you must adhere to. The magic number was derived without consideration of its proper definition and what assets and income streams should be used in calculating the number you will compare to your magic number. Now you are considering changing how you calculate the number you compare to your magic number, and magically (not!), you discover that your new calculated number calculated with a new definition is different from the old calculated number calculated with the old definition.Munir wrote:My "problem" is that I had been considering the SPIA residual value as calculated by the insurance company annually as part of my fixed income allocation, and detemined my equity allocation acordingly. When I recalculated my aset allocation and disregarded the SPIA, I find the my equity allocation is much higher because I've lowered the fixed income allocation by omitting the SPIA, and thus decreased the size of the whole pie. Based on the new calculations, that means I should be lowering my equity allocation which I find hard to do.
The correct answer is that if you are going to change how you calculate the number to compare to the magic number then you have to change how you calculate the magic number. If your magic number is 60% using one method of calculation it can't be 60% if you switch to another method.
If you are happy with the stock holdings you have, keep them the same, no matter how you decide to calculate "the number."
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Re: Is An SPIA Considered Part Of Fixed Allocation In Asset
Roosevelt,
Private equity is equity risk, although I wouldn't treat it exactly the same as common stock because it's illiquid. That actually makes it more risky. Business has been good for 70 years, but one never knows what the future holds for any equity investment.
Rick Ferri
Private equity is equity risk, although I wouldn't treat it exactly the same as common stock because it's illiquid. That actually makes it more risky. Business has been good for 70 years, but one never knows what the future holds for any equity investment.
Rick Ferri
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Re: Is An SPIA Considered Part Of Fixed Allocation In Asset
Perhaps, this will help in thinking about the problem:
Why do you have just one asset allocation for all your money? You don't spend it all at once in one big lump sum, so why should you have just one number for everything.
Instead, you should break your assets down by how you're going to use them and then do the asset allocation separately for each class. Here's an example of how I do it:
1. Money for essential, undeferable expenses like food at home, health insurance, utilites, taxes, etc. My asset allocation for this category is 0/0. I can't afford to take any risk with this category so both stocks and publically traded bonds are out; my funds are in pensions, Social Security contributions, and annuities.
2. Money for essential but somewhat deferable expenses like getting a new car or replacing a roof. If worse comes to worse, I can probably do short term repairs and delay these expenses for a year or two, so I can wait out most bear markets. 50% stocks/50% bonds.
3. Money for a bequest. 100% stocks. If the market is down when I die, my children can wait for the market to go back up before they sell.
The general idea is that the more flexibility you have in when to spend the money, the higher the percentage of volatile assets.
If I wanted to, I suppose I could go back and figure out an overall asset allocation based on how much money I've put in each category, but I couldn't really compare it with anyone else's asset allocation, unless I knew when and how they were planning to spend the money.
Why do you have just one asset allocation for all your money? You don't spend it all at once in one big lump sum, so why should you have just one number for everything.
Instead, you should break your assets down by how you're going to use them and then do the asset allocation separately for each class. Here's an example of how I do it:
1. Money for essential, undeferable expenses like food at home, health insurance, utilites, taxes, etc. My asset allocation for this category is 0/0. I can't afford to take any risk with this category so both stocks and publically traded bonds are out; my funds are in pensions, Social Security contributions, and annuities.
2. Money for essential but somewhat deferable expenses like getting a new car or replacing a roof. If worse comes to worse, I can probably do short term repairs and delay these expenses for a year or two, so I can wait out most bear markets. 50% stocks/50% bonds.
3. Money for a bequest. 100% stocks. If the market is down when I die, my children can wait for the market to go back up before they sell.
The general idea is that the more flexibility you have in when to spend the money, the higher the percentage of volatile assets.
If I wanted to, I suppose I could go back and figure out an overall asset allocation based on how much money I've put in each category, but I couldn't really compare it with anyone else's asset allocation, unless I knew when and how they were planning to spend the money.
Re: Is An SPIA Considered Part Of Fixed Allocation In Asset
Thank you for the detailed and thoughtful responses I have received. I appreciate the time reponders have taken to help me.
As a quick background, I'm a 75 years old retiree in a distribution phase which includes RMDs from my traditional IRA and from the two SPIAs I purchased two years ago from my fixed income allocation. My RMDs meet my living expenses and I do need and use them as such.
In contrast to a defined benefit plan (which I don't have), I have always considered the SPIAs as part of my fixed income allocation because that's how they were purchased with IRA funds. With that consideration, my equity allocation has been around 30-32%- which I have been happy with. If I exclude the SPIAs from the calculations, my equity percentage jumps to 43%- which I do not want. I came to this realization just a couple of days ago when I was playing around with the numbers.
My tendency at this point is to follow nisi's advice and just sit tight. I need to think matters over more thoroughly based on the advice received including Rick's liability reduction method and ourbrooks suggestion of having separate allocation formulas for separate buckets. If and when rates go up, my plan has been to purchase more SPIAs in a ladder fashion- which makes a thoughtful and planned response even more important. Thank you again for the feedback.
As a quick background, I'm a 75 years old retiree in a distribution phase which includes RMDs from my traditional IRA and from the two SPIAs I purchased two years ago from my fixed income allocation. My RMDs meet my living expenses and I do need and use them as such.
In contrast to a defined benefit plan (which I don't have), I have always considered the SPIAs as part of my fixed income allocation because that's how they were purchased with IRA funds. With that consideration, my equity allocation has been around 30-32%- which I have been happy with. If I exclude the SPIAs from the calculations, my equity percentage jumps to 43%- which I do not want. I came to this realization just a couple of days ago when I was playing around with the numbers.
My tendency at this point is to follow nisi's advice and just sit tight. I need to think matters over more thoroughly based on the advice received including Rick's liability reduction method and ourbrooks suggestion of having separate allocation formulas for separate buckets. If and when rates go up, my plan has been to purchase more SPIAs in a ladder fashion- which makes a thoughtful and planned response even more important. Thank you again for the feedback.
Last edited by Munir on Wed Jul 18, 2012 10:48 am, edited 1 time in total.
Re: Is An SPIA Considered Part Of Fixed Allocation In Asset
+1 Exactly.retiredjg wrote:I wouldn't consider it part of the portfolio at all. The money is gone. It won't ever come back. It has been replaced by an income stream which reduces the need to draw from your portfolio.Munir wrote:Is an SPIA (or at least the balance on the annual statement issued by the insurance company) considered part of the fixed income portion of a portfolio when calculating percentages of assets?
Re: Is An SPIA Considered Part Of Fixed Allocation In Asset
Thank you, Rick, for the link. For retirement planning purposes, I have long used the liability reduction approach described in your fine article. While I don't consider an SPIA, annuitized TIAA-CREF, pension, SS, etc., as a bond or as part of one's portfolio, the affect on my asset allocation has been to underscore the need to construct a portfolio designed to meet/exceed the delta between expected expenses and the sum of any/all income streams coming from those mentioned sources.Rick Ferri wrote:Money that is committed to an SPIA would not be considered a bond. It's more like a pension. Unlike a bond, a pension benefit has no maturity date. They do, however, have a termination date. The cash flows end when you end (or your spouse dies), whenever that is, and the par value paid upon your termination is $0. Like a pension, SPIA's have no investment value once the beneficiaries die.
So, the question is, is a pension a bond? Here is an article I co-authored with Craig Israelsen about this topic, Is a Pension a Bond? Just substitute SPIA for pension. I believe the article gets to the heart of your question.
Rick Ferri
By not considering them as bonds I, therefore, feel no need whatsoever to "risk-up" the AA in terms of increased equities.
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Re: Is An SPIA Considered Part Of Fixed Allocation In Asset
Rick:
I appreciate your answering this question.
Roosevelt.
I appreciate your answering this question.
Roosevelt.
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Re: Is An SPIA Considered Part Of Fixed Allocation In Asset
Let me ask the question a little differently and tell me how you answer it. Talking about the differences between bonds and SPIAs doesn't really help. I really want to focus on one very specific question: assuming you do not want to change your risk tolerance equation, what exactly should you do at the point when you decide to buy an SPIA? This is a practical question that needs a practical answer.Rick Ferri wrote:Money that is committed to an SPIA would not be considered a bond. It's more like a pension.
If you have $500,000 each in stocks and bonds, 50/50, and you decide to annuitize 1/4 of your portfolio, which should you do?
a) Liquidate $250,000 in bonds, so that your remaining portfolio becomes $500,000 stocks, $250,000 bonds = 66.7/33.3? This preserves your asset allocation if you count the SPIA as "frozen bonds."
b) Liquidate $125,000 each in stocks and bonds so that your remaining portfolio becomes $375,000 stocks, $375,000 bonds? This preserves your asset allocation if you no longer count the SPIA within your portfolio.
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Re: Is An SPIA Considered Part Of Fixed Allocation In Asset
What did you do to arrive at your original asset allocation? Presumably, you made some sort of analysis of your income, expenses, assets, and other relevant facts to arrive at a level of risk you were comfortable taking in your portfolio.nisiprius wrote:assuming you do not want to change your risk tolerance equation, what exactly should you do at the point when you decide to buy an SPIA? This is a practical question that needs a practical answer.
If that presumption is true, my suggestion would be, "Do that again."
In case this sounds flippant, I assure you I don't mean it that way. Assuming the amount annuitized was significant, I really think the best response is to reevaluate the situation from scratch to determine an appropriate allocation rather than try to simply adapt the original plan. Or said differently, I'd try to avoid developing any rules of thumb as to what part(s) of the portfolio the money for annuitization should come from.
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Re: Is An SPIA Considered Part Of Fixed Allocation In Asset
It depends on what you are going to do with the rest of the money. Here are two, correct, contradictory answers:
1. I'm going to continue to withdraw from my portfolio for ongoing expenses. Sell some of each and stay at 50/50. If you are doing regular withdrawals, you need to keep risk at moderate levels. There's a real financial issue plus there's the fear factor.
2. With the SPIA, all of my basic expenses are now covered. The purpose of my portfolio is to leave a surprise bequest for my kids. Sell all the bonds, even the ones you don't need to sell. Go 100% stocks. Worse case, you die in a down market; your kids can wait for it to recover.
In some respects, answer 2 is changing your risk tolerance equation, but it really ought to change. You've completely eliminated the chance of eating dog food. If just the sight of a reduced balance panics you, have your statements sent to a friend who will only send them to you two years late.
In retirement, you need different amounts of money at different times. It just doesn't make sense to me to try and come up with one risk tolerance level and one asset allocation for all of your finances.
1. I'm going to continue to withdraw from my portfolio for ongoing expenses. Sell some of each and stay at 50/50. If you are doing regular withdrawals, you need to keep risk at moderate levels. There's a real financial issue plus there's the fear factor.
2. With the SPIA, all of my basic expenses are now covered. The purpose of my portfolio is to leave a surprise bequest for my kids. Sell all the bonds, even the ones you don't need to sell. Go 100% stocks. Worse case, you die in a down market; your kids can wait for it to recover.
In some respects, answer 2 is changing your risk tolerance equation, but it really ought to change. You've completely eliminated the chance of eating dog food. If just the sight of a reduced balance panics you, have your statements sent to a friend who will only send them to you two years late.
In retirement, you need different amounts of money at different times. It just doesn't make sense to me to try and come up with one risk tolerance level and one asset allocation for all of your finances.
Re: Is An SPIA Considered Part Of Fixed Allocation In Asset
That's exactly how I see it, Mike.ObliviousInvestor wrote:What did you do to arrive at your original asset allocation? Presumably, you made some sort of analysis of your income, expenses, assets, and other relevant facts to arrive at a level of risk you were comfortable taking in your portfolio.nisiprius wrote:assuming you do not want to change your risk tolerance equation, what exactly should you do at the point when you decide to buy an SPIA? This is a practical question that needs a practical answer.
If that presumption is true, my suggestion would be, "Do that again."
- 1. When you don't have money annuitized, you should set criteria to invest Assets based on ability and need for risk.
2. When you annuitize a portion, you should set different criteria to invest "remaining" Assets based on revised ability and need for risk.
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Re: Is An SPIA Considered Part Of Fixed Allocation In Asset
FYI, "an [sic] SPIA," should be a SPIA. Please excuse me; but this grammar mistake of mixing up 'an' and 'a' is so common on this forum, I just can't stand it anymore!
Ref: http://www.englishclub.com/pronunciation/a-an.htm
OK, please continue. -- Tet
Ref: http://www.englishclub.com/pronunciation/a-an.htm
OK, please continue. -- Tet
Re: Is An SPIA Considered Part Of Fixed Allocation In Asset
Landy,YDNAL wrote:That's exactly how I see it, Mike.ObliviousInvestor wrote:What did you do to arrive at your original asset allocation? Presumably, you made some sort of analysis of your income, expenses, assets, and other relevant facts to arrive at a level of risk you were comfortable taking in your portfolio.nisiprius wrote:assuming you do not want to change your risk tolerance equation, what exactly should you do at the point when you decide to buy an SPIA? This is a practical question that needs a practical answer.
If that presumption is true, my suggestion would be, "Do that again."
It's really that simple, IMO.
- 1. When you don't have money annuitized, you should set criteria to invest Assets based on ability and need for risk.
2. When you annuitize a portion, you should set different criteria to invest "remaining" Assets based on revised ability and need for risk.
To me, that approach is consistent with another piece of advice (rule of thumb) I have seen you often give here: take the difference between one's expected income streams from SS, DBP, etc., and expenses and multiply by 25, 30, or 35 times, then set an AA to achieve that accumulation. Something I completely agree with.
The fundamental things apply as time goes by -- Herman Hupfeld
Re: Is An SPIA Considered Part Of Fixed Allocation In Asset
Tet - I believe it's to the contrary based on your link and common usuage. SPIA has a vowel sound and is therefore an SPIA.tetractys wrote:FYI, "an [sic] SPIA," should be a SPIA. Please excuse me; but this grammar mistake of mixing up 'an' and 'a' is so common on this forum, I just can't stand it anymore!
Ref: http://www.englishclub.com/pronunciation/a-an.htm
OK, please continue. -- Tet
Please continue.
John
Re: Is An SPIA Considered Part Of Fixed Allocation In Asset
Mea culpa. My mistake. I'm usually very particular about language too (except for typos), but I slipped this time. Sorry, Tet.tetractys wrote:FYI, "an [sic] SPIA," should be a SPIA. Please excuse me; but this grammar mistake of mixing up 'an' and 'a' is so common on this forum, I just can't stand it anymore!
Ref: http://www.englishclub.com/pronunciation/a-an.htm
OK, please continue. -- Tet
Re: Is An SPIA Considered Part Of Fixed Allocation In Asset
Agree... an Annuity (singular) - of the Single Premium Immediate kind.JDCPAEsq wrote:Tet - I believe it's to the contrary based on your link and common usuage. SPIA has a vowel sound and is therefore an SPIA.tetractys wrote:FYI, "an [sic] SPIA," should be a SPIA. Please excuse me; but this grammar mistake of mixing up 'an' and 'a' is so common on this forum, I just can't stand it anymore!
Ref: http://www.englishclub.com/pronunciation/a-an.htm
OK, please continue. -- Tet
Please continue.
John
Landy |
Be yourself, everyone else is already taken -- Oscar Wilde
Re: Is An SPIA Considered Part Of Fixed Allocation In Asset
Thank you, John. That's why I chose "an" instead of "a". It sounds correct, even though grammatically it may not be.JDCPAEsq wrote:Tet - I believe it's to the contrary based on your link and common usuage. SPIA has a vowel sound and is therefore an SPIA.tetractys wrote:FYI, "an [sic] SPIA," should be a SPIA. Please excuse me; but this grammar mistake of mixing up 'an' and 'a' is so common on this forum, I just can't stand it anymore!
Ref: http://www.englishclub.com/pronunciation/a-an.htm
OK, please continue. -- Tet
Please continue.
John
Re: Is An SPIA Considered Part Of Fixed Allocation In Asset
Your link actually contradicts what you said.tetractys wrote:FYI, "an [sic] SPIA," should be a SPIA. Please excuse me; but this grammar mistake of mixing up 'an' and 'a' is so common on this forum, I just can't stand it anymore!
Ref: http://www.englishclub.com/pronunciation/a-an.htm
OK, please continue. -- Tet
It says to use "an" when what follows has a vowel sound. "S" (pronounced "ES") is a vowel sound, therefore "an" is correct.
I suppose if you are thinking "Single" instead of "S", you would be right, but who does that?
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Re: Is An SPIA Considered Part Of Fixed Allocation In Asset
"An" is correct because the 's" in SPIA sounds like "es" and therefore "an" is correct supported by the rule Tet cited himself. Therefore you would say "a senator" but your would also say "an SPIA".
John
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Re: Is An SPIA Considered Part Of Fixed Allocation In Asset
My contention is that when you do that, the answer you will come up should be that you should buy the SPIA using liquidated bonds (or existing cash). Because when you do that, your situation hasn't changed materially, so the analysis shouldn't change materially.YDNAL wrote:That's exactly how I see it, Mike.ObliviousInvestor wrote:What did you do to arrive at your original asset allocation? Presumably, you made some sort of analysis of your income, expenses, assets, and other relevant facts to arrive at a level of risk you were comfortable taking in your portfolio. If that presumption is true, my suggestion would be, "Do that again."nisiprius wrote:assuming you do not want to change your risk tolerance equation, what exactly should you do at the point when you decide to buy an SPIA? This is a practical question that needs a practical answer.It's really that simple, IMO.
- 1. When you don't have money annuitized, you should set criteria to invest Assets based on ability and need for risk.
2. When you annuitize a portion, you should set different criteria to invest "remaining" Assets based on revised ability and need for risk.
An SPIA is frozen bonds. It's different from bonds if you need them to be liquid, e.g. if you are accumulating and your investing strategy depends on rebalancing. It's not different from bonds if you don't need them to be liquid. In retirement, it's not so important for them to be liquid--you will be using bonds primarily as the source of an income stream, not as a source of fluctuating capital value. So at that point one income stream is like another and can be substituted for another.
To the extent that the SPIA payouts are higher and fluctuate less than bond interest, one might suggest that stock allocation could even be increased further if desired.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Re: Is An SPIA Considered Part Of Fixed Allocation In Asset
HA HA, trying to refute second grade grammar with seventh grade logic! Sorry, we're talking about a SPIA, not an A of the SPI. The simple purpose of this rule is lyrical flow between adjacent syllables, nothing more. -- TetYDNAL wrote:Agree... an Annuity (singular) - of the Single Premium Immediate kind.JDCPAEsq wrote:Tet - I believe it's to the contrary based on your link and common usuage. SPIA has a vowel sound and is therefore an SPIA.tetractys wrote:FYI, "an [sic] SPIA," should be a SPIA. Please excuse me; but this grammar mistake of mixing up 'an' and 'a' is so common on this forum, I just can't stand it anymore!
Ref: http://www.englishclub.com/pronunciation/a-an.htm
OK, please continue. -- Tet
Please continue.
John
Re: Is An SPIA Considered Part Of Fixed Allocation In Asset
You would be correct if the acronym was spelled out. I don't think too many people do that. A SPIA? Yes. An S-P-I-A? What, do you mean a SPIA? -- TetJDCPAEsq wrote:"An" is correct because the 's" in SPIA sounds like "es" and therefore "an" is correct supported by the rule Tet cited himself. Therefore you would say "a senator" but your would also say "an SPIA".
John
Re: Is An SPIA Considered Part Of Fixed Allocation In Asset
Edit: Was wrong.
Last edited by rr2 on Wed Jul 18, 2012 2:46 pm, edited 1 time in total.
Re: Is An SPIA Considered Part Of Fixed Allocation In Asset
It is spelled out. Do you say it as a word? Never heard of that.
John
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Re: Is An SPIA Considered Part Of Fixed Allocation In Asset
We've had this discussion before. http://www.bogleheads.org/forum/viewtopic.php?t=60714JDCPAEsq wrote:It is spelled out. Do you say it as a word? Never heard of that.
John
Personally, outside of this forum, I've always heard it pronounced as a word: "speeuh."
Mike Piper |
Roth is a name, not an acronym. If you type ROTH, you're just yelling about retirement accounts.
Re: Is An SPIA Considered Part Of Fixed Allocation In Asset
I would suggest just determining what the requirements will be for your remaining assets, and allocate them accordingly.Munir wrote:Is an SPIA (or at least the balance on the annual statement issued by the insurance company) considered part of the fixed income portion of a portfolio when calculating percentages of assets?
1) You know with a SPIA, you can't get out more every year than what the contract says, so you need to maintain ample liquidity outside of the annuity for unexpected emergencies (read: short term bonds).
2) You also need to understand that there is a good chance your living standards over your lifetime will outstrip CPI measurements, so you need to invest in a way so that you have additional assets and spending power above the CPI adjusted income stream you've permanently locked in. Conservative estimates have our "per capita consumption expenditures (PCCE)" rising at about 2% per year above CPI estimates, which is the additional level of purchasing power you need to factor in to "keep up with the Joneses", or just to maintain the same lifestyle you have today relative to everyone else, instead of falling far behind.
I think you know where I am going with this, but just for the sake of it, let me provide the average returns for various asset classes in excess of CPI and PCCE from 1942-2008 ('42 is the first year that 1/2yr bond data is available):
1mo bills = -1.8%
2yr notes = -0.7%
5yr notes = -0.3%
30yr bonds = +0.2%
TSM = +6.1%
Market-wide Value = +11.0%
Small Cap = +9.7%
So, while narrative isn't needed here, we can clearly see that you can't get there with bonds. They need to be viewed through the lens of: low risk and liquidity, with the increase in returns per unit of risk fading quickly after you go from 1mo to 2yrs. Stocks have to be part of the plan (despite everyone's favorite point about tail risk and not being safer over longer periods if viewed in terms of worst case outcomes), and that includes a healthy dollop of small and value (or just small and value).
Conceivably, if the SPIA has had a major reduction on your income needs, you can/should consider allocating more to stocks to (a) create the probability for as much CPI/CPPE adjusted wealth outside the annuity as possible for an inheritance or unexpectedly large spending needs later on in life (health, family emergencies, etc.).
Just remember, risk is NOT losing money this year. RIsk is not having the $ during your lifetime to do the things you need to do. You can recover from equity losses (esp. if you don't sell before a recovery and you have enough ST bonds to get you by). You cannot recover from your income falling behind your required spending power.
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Re: Is An SPIA Considered Part Of Fixed Allocation In Asset
Yes, but I could be wrong. Maybe it rhymes with CIA.... Or perhaps what we really SHOULD do, is follow a or an as a writer's que on how they expect us to pronounce what follows.JDCPAEsq wrote:It is spelled out. Do you say it as a word? Never heard of that.
John
On subject, I think Rick in his article linked to above, makes the most sense, from which I traspose as instructions for an individual investor:
Take into account anticipated cash flows from illiquid and uncontrollable assets without attempting to calculate a precise present value. For planning purposes, consider anticipated pension or Social Security cash flows as part of your monthly income, offsetting some portion of monthly expenses. The remaining monthly liabilities, together with risk preferences and desire for asset growth, will then determine the asset allocation model in your retirement portfolio.
I find this interesting because I am in the process of accumulating a pension. Until retirement my contribution collects interest and can be withdrawn under the right circumstances. So up to retirement, with it's definite value and growth, I am considering it as a bond. But then after retirement when that becomes an income stream with an indefinite value, I will reset my portfolio asset allocation accordingly. -- Tet
Re: Is An SPIA Considered Part Of Fixed Allocation In Asset
Speeuh? Oh my, that's too funny! Never even crossed my mind.ObliviousInvestor wrote:Personally, outside of this forum, I've always heard it pronounced as a word: "speeuh."JDCPAEsq wrote:It is spelled out. Do you say it as a word? Never heard of that. John
In that case, I guess it is "a" speeuh. But I'm just going to avoid it in the future by using some fancy alternate wording.
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Re: Is An SPIA Considered Part Of Fixed Allocation In Asset
My conclusion: I pronounce SPIA as es-pee-eye-aay. Since it starts with es, it needs "an" and not "a" before it.retiredjg wrote:Speeuh? Oh my, that's too funny! Never even crossed my mind.ObliviousInvestor wrote:Personally, outside of this forum, I've always heard it pronounced as a word: "speeuh."JDCPAEsq wrote:It is spelled out. Do you say it as a word? Never heard of that. John
In that case, I guess it is "a" speeuh. But I'm just going to avoid it in the future by using some fancy alternate wording.
Re: Is An SPIA Considered Part Of Fixed Allocation In Asset
That's got a nice cowboy ring to it, Yippe Yi Yo Ki Yay!