Retiree Dilemma

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
oldmanlaurence
Posts: 7
Joined: Tue Jan 12, 2016 2:19 pm

Retiree Dilemma

Post by oldmanlaurence » Tue Jan 12, 2016 2:48 pm

Hi all,

I recently started managing a $540000 portfolio myself after account value dropped from $680000 on October, 2014, due to active advisor mismanagement. This is all the money I have. I'm 69 years old and need to live off this.

I'm currently sitting 50%in cash and 80/20 in dividend stocks/bonds. As set up they yield $16000 in dividends and interest. I get another $7000 in social security.

I was planning on buying an immediate annuity with $167000 yielding $12000 a year.
For a total of $35000/year with dividend compounding possibilities.

During the last week of market drops, the fear has set in. And this isn't even close to a melt down.

I'm considering selling the ENTIRE portfolio and completely annuitizing. I know this goes against every single investment advice out there. However, if I follow through, I get $3700 per month for LIFE. I can live on $1600 per month in a pinch. So with this scenario, I can conceivably SAVE $20000 per year.
If I implement before my account value further deteriorates, I'm left with a $40000 cushion. I also have a house worth $100000 which if sold gives me a mini portfolio maybe kicking out another $5000 per year.

People talk about "inflation protection". My inflation protection is spend less. I recently returned from 2 months in India where I can live nicely for $600 a month. I understand Ecuador is close.

I understand this is NOT a Boglehead schema. But there are so many astute investors on this forum, I really appreciate your feedback.

Thanks,
Laurence

User avatar
cfs
Posts: 3391
Joined: Fri Feb 23, 2007 1:22 am
Location: On my camino since 2014

Re: Retiree Dilemma

Post by cfs » Tue Jan 12, 2016 3:38 pm

oldmanlaurence wrote:. . . . I recently started managing a $540000 portfolio myself after account value dropped from $680000 on October, 2014, due to active advisor mismanagement . . .

Welcome aboard!

Ahoy! A new shipmate! Your first post! Great to see new shipmates reporting aboard! Let me give your post a bump for visibility. Your questions are very important, please wait for inputs from our awesome shipmates. If you don't see replies within 24 hours please click the "Post Reply" button, and post your questions again.

Again, welcome aboard!
~ Donating Member ~

Alex Frakt
Founder
Posts: 10730
Joined: Fri Feb 23, 2007 1:06 pm
Location: Chicago
Contact:

Re: Retiree Dilemma

Post by Alex Frakt » Tue Jan 12, 2016 3:49 pm

Your minimum living expenses are $19,200 per year. You get $7,000 from SS.

You have enough. I suggest annuitizing only enough to cover the remaining $12,200 which is just under $170,000 based on what you've been quoted. I suspect that looking at the daily returns of your holdings (or the market in general) is causing you a lot of unnecessary stress. A balanced fund can help with that as well as simplifying your finances in general. I'd just put the rest in Vanguard Target Retirement Income, have maybe 1/2 of the dividends deposited to your checking account and enjoy your retirement.

Code: Select all

VTINX Performance Overview    
Year-to-Date Return:                     -0.17%
5-Year Average Return:                    4.91%
Number of Years Up:                      10
Number of Years Down:                     2
Best 1 Yr Total Return (2009-12-31):     14.28%
Worst 1 Yr Total Return (2008-12-31):   -10.93%
Best 3-Yr Total Return (N/A):             9.58%
Worst 3-Yr Total Return (N/A):            0.82%

Edit. Another option is Vanguard LifeStrategy Income. It's been around longer and is slightly more conservative.

Code: Select all

VASIX Performance Overview    
Year-to-Date Return:                      0.22%
5-Year Average Return:                    4.11%
Number of Years Up:                      20
Number of Years Down:                     1
Best 1 Yr Total Return (2009-12-31):     12.08%
Worst 1 Yr Total Return (2008-12-31):   -10.53%
Best 3-Yr Total Return (N/A):             8.30%
Worst 3-Yr Total Return (N/A):            1.00%

dbr
Posts: 23745
Joined: Sun Mar 04, 2007 9:50 am

Re: Retiree Dilemma

Post by dbr » Tue Jan 12, 2016 3:58 pm

The above is good advice. Definitely do not annuitize down to the last penny. That will leave you with no reserve for contingencies and changes of situation. It seems illogical to get rid of all your money and then start saving it back. Remember one can always buy additional annuities.

Alex Frakt
Founder
Posts: 10730
Joined: Fri Feb 23, 2007 1:06 pm
Location: Chicago
Contact:

Re: Retiree Dilemma

Post by Alex Frakt » Tue Jan 12, 2016 4:34 pm

dbr wrote:It seems illogical to get rid of all your money and then start saving it back. Remember one can always buy additional annuities.

Not only can you buy additional annuities, every year you wait will likely give you a better return on your annuity purchase. This is somewhat dependent on interest rates, but I don't think you'll find too many people worried about interest rates dropping from their current point.

adamthesmythe
Posts: 1613
Joined: Mon Sep 22, 2014 4:47 pm

Re: Retiree Dilemma

Post by adamthesmythe » Tue Jan 12, 2016 4:40 pm

Usually the recommendation is against annuitizing the entire portfolio. Keeping some back (1) makes it possible to get some inflation protection and (2) allows for unexpected expenses.

If you don't need the entire thing to be annuitized to get the income you need now- maybe you should consider putting the remainder in bonds (a bond index, or better a conservative mix of stocks and bonds).

delamer
Posts: 3116
Joined: Tue Feb 08, 2011 6:13 pm

Re: Retiree Dilemma

Post by delamer » Tue Jan 12, 2016 9:16 pm

Wouldn't your investment income fall if you annuitize part of your savings? It looks like you added your SS, annuity payout, and current investment income to get to the $35,000.

mhalley
Posts: 5139
Joined: Tue Nov 20, 2007 6:02 am

Re: Retiree Dilemma

Post by mhalley » Tue Jan 12, 2016 10:06 pm

Jim Otar has gone into great detail on how much to annuitize in his book Unveiling the Retirement Myth. You can pick up the PDF version for $5.99 at http://www.retirementoptimizer.com/
He also recommends doing annuity ladders.

JCE66
Posts: 253
Joined: Wed Jul 15, 2015 6:08 pm

Re: Retiree Dilemma

Post by JCE66 » Wed Jan 13, 2016 11:10 am

oldmanlaurence...I strongly advise against putting all your eggs in one basket; meaning, annuitizing your entire portfolio. That annuity is only as safe and secure as the company paying it. I thought Alex had this one right. Take ~170K and annuitize that. You have now covered your living expenses. And BTW, you have won the game - so nice job and congratulations.

As for the remainder of your portfolio, I'll say this. It seems to me you should have a 50/50 mix of equity index funds and bond index funds. Just set it and forget it. Over a long horizon (10 years or more) you are not likely to lose money. If you're serious about Ecuador, look into Cuenca. There is a fairly large US ex-pat community there. I would also tell you that if you don't have good Spanish skills, don't bother going to Ecuador. You'll have an incredibly difficult time just taking care of the basics of life.

User avatar
SeeMoe
Posts: 855
Joined: Sat Jul 18, 2015 11:30 am
Location: Near Philly..

Re: Retiree Dilemma

Post by SeeMoe » Wed Jan 13, 2016 12:29 pm

I too am a new member, so in that event I Will not begin by stating:"I recommend," or " I would advise you to.." Etc . The above posts appear to lean toward annuities, or laddered annuities in your case . What I am curious about is the money manager who evidently " churned" your portfolio before you fired him . Very disconcerting to have that happen to you . Same occurred to me years ago when I was a Drexel Burnham customer before The Milliken bond king fiasco flap...Have you considered discussing your dilemma with a paid consultant, or maybe a CPA who does not " recommend" buying anything he may be peddling ? Best to you in retirement, sir .
SeeMoe.. :beer
"By gnawing through a dike, even a Rat can destroy a nation ." {Edmund Burke}

livesoft
Posts: 56608
Joined: Thu Mar 01, 2007 8:00 pm

Re: Retiree Dilemma

Post by livesoft » Wed Jan 13, 2016 12:32 pm

A potential problem with annuitizing the whole kit-and-kaboodle is that sometimes one needs a big chunk of money for a home repair, a new car, a hip replacement, whatever. The monthly cash flow from an annuity would probably not cover this kind of cash flow.
This signature message sponsored by sscritic: Learn to fish.

oldmanlaurence
Posts: 7
Joined: Tue Jan 12, 2016 2:19 pm

Re: Retiree Dilemma

Post by oldmanlaurence » Thu Jan 14, 2016 1:39 pm

The annuity I'm looking at has a one time cash out. Plus an option to cash out 25% at year five. And 25% at year ten. If I purchase 3 annuities at $168000 each, I can bail in whatever combo I desire. There is also an option for a six month pay ahead=potentially $18000 chunk at once) Meanwhile I'm potentially SAVING $15000-$20000 per year. (I can live cheap) I like the idea of reinvesting house money, rather than watching potential permanent portfolio loss.

You're talking to someone whose portfolio dropped from $680000 in Oct/2014 to $550000 in Oct/2015, and has just lost another $15000 since Jan 1. I feel like I'm running out of room.

$3000 per month for LIFE PLUS another $600 SSI, worry free seems real doable at the moment.

Laurence

oldmanlaurence
Posts: 7
Joined: Tue Jan 12, 2016 2:19 pm

Re: Retiree Dilemma

Post by oldmanlaurence » Thu Jan 14, 2016 1:55 pm

I'd like to respond to Alex's post above with numbers from a couple funds:

e.g. with a "worst 3 year return of .8%" I'd be giving up over $100000 vs annuity.
with "best 3 year AVG of 8.5 something" I'd be losing out of maybe $7000 per, or a possible $21000 upside over 3 years.

7.2% with NO DOWNSIDE EVER looks pretty damn good to me.

Laurence

User avatar
Taylor Larimore
Advisory Board
Posts: 26142
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Never own more in stocks than you can afford to lose.

Post by Taylor Larimore » Thu Jan 14, 2016 2:08 pm

oldmanlawrence:

Welcome to the Bogleheads Forum!

A very important rule of thumb (especially for retirees) is to never own more in stocks than you can afford to lose.

Best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

randomguy
Posts: 4890
Joined: Wed Sep 17, 2014 9:00 am

Re: Retiree Dilemma

Post by randomguy » Thu Jan 14, 2016 3:03 pm

oldmanlaurence wrote:I'd like to respond to Alex's post above with numbers from a couple funds:

e.g. with a "worst 3 year return of .8%" I'd be giving up over $100000 vs annuity.
with "best 3 year AVG of 8.5 something" I'd be losing out of maybe $7000 per, or a possible $21000 upside over 3 years.

7.2% with NO DOWNSIDE EVER looks pretty damn good to me.

Laurence


7.2% includes a huge amount of return of principle. You can't directly compare the two numbers despite what annuity companies want you to believe.

It really sounds like you should annuitize some money for piece of mind. The question is how much. Personally I think I would go with something like like 200-250k in an annuity today (or maybe split it up into 3-4 purchases over the next 3-4 years) and something like 25k in an longevity annuity (it pays out when your turn 85. Thats is your inflation insurance), keep 25k in cash as an ER fund and invest the rest 50/50. You can either once/yr (something like 5-7% of the account balance would be a simple way to go. You can go fancier with a fixed SWR or VPW if you want) take money out of the investment account to spend on luxuries or you can just ignore it if the annuities are paying the bills. And then stop checking the account balances and get on with enjoying retirement.

Alex Frakt
Founder
Posts: 10730
Joined: Fri Feb 23, 2007 1:06 pm
Location: Chicago
Contact:

Re: Retiree Dilemma

Post by Alex Frakt » Thu Jan 14, 2016 4:31 pm

randomguy wrote:
oldmanlaurence wrote:I'd like to respond to Alex's post above with numbers from a couple funds:

e.g. with a "worst 3 year return of .8%" I'd be giving up over $100000 vs annuity.
with "best 3 year AVG of 8.5 something" I'd be losing out of maybe $7000 per, or a possible $21000 upside over 3 years.

7.2% with NO DOWNSIDE EVER looks pretty damn good to me.

Laurence


7.2% includes a huge amount of return of principle. You can't directly compare the two numbers despite what annuity companies want you to believe.

Exactly. In your calculation you are forgetting that you would still have over $500,000 in principal which you can use to cover your remaining expenses and anything else that comes up.

Frankly, if I were in your situation, I wouldn't annuitize any of it. The income stream from $540,000 in one of the funds I suggested should more than cover your expected living expenses and if anything unexpected comes up, you can tap your principal as needed. But I understand why you want some certainty which is why I suggest a hybrid approach of annuitizing only enough to cover your expected expenses.

If you are really that risk averse, I still suggest the same thing, but buy CDs with most of the remaining funds. If interest rates increase dramatically, you'll be much better off purchasing additional annuities later rather than locking everything in today at near historically low rates.

Shallowpockets
Posts: 260
Joined: Fri Nov 20, 2015 10:26 am

Re: Retiree Dilemma

Post by Shallowpockets » Thu Jan 14, 2016 4:43 pm

Could you tell me what funds you are invested in?
You state collecting $16000 year in interest and dividends. I only need $20k a year for my needs, so that is close.
According to your numbers $540000 with half in cash. So,you are reaping $16k a year off of $270000. That is an average of about 6%. Pretty good there.
So that is why I am interested. I could easily put $270k into those funds and it would be doing well for me if I got that $16k a year. When I take SS in Sept at 66 for approx $24k a year that would give me a highly maneuverable lifestyle.
Thanks.

Levett
Posts: 4170
Joined: Fri Feb 23, 2007 2:10 pm
Location: upper Midwest

Re: Retiree Dilemma

Post by Levett » Thu Jan 14, 2016 4:58 pm

Hi laurence,

You do have an ace up your sleeve in that you are apparently aware of and willing to move to another less expensive country--e.g.,

"People talk about "inflation protection". My inflation protection is spend less. I recently returned from 2 months in India where I can live nicely for $600 a month. I understand Ecuador is close." (And Ecuador pegs to the U.S. dollar.)

It's interesting to see how fairly standard financial advice recommends against "home country bias," and yet there appears to be a general unwillingness to consider retirement in another country. I think you are ahead of the game by considering such an option. :thumbsup

Lev

oldmanlaurence
Posts: 7
Joined: Tue Jan 12, 2016 2:19 pm

Re: Retiree Dilemma

Post by oldmanlaurence » Thu Jan 14, 2016 5:45 pm

Great post Randomguy,

I really appreciate the help.
BTW-what are SWR and VPW?

Thanks
L

oldmanlaurence
Posts: 7
Joined: Tue Jan 12, 2016 2:19 pm

Re: Retiree Dilemma

Post by oldmanlaurence » Thu Jan 14, 2016 6:02 pm

Hi Shallowpockets:

Believe me when I say I don't know what I'm doing. I got creamed by an active advisor (right on the brink of fraud). So I decided to invest myself, immediately saving $14000 a year in fees and expenses. I wish I found you guys ten years ago.

That said-I'm not in any funds(except for DVY which I had). I've selected dividend paying stocks, culling thru advice on seeking alpha. I try to find good companies with excellent dividend growth rates, with long track records. This, theoretically builds in internal compounding in the portfolio, regardless what the share price is. I like to see money coming in. Account value seems to be virtual. If a stock yields say 3.5% and increases divs at 10%+ per year, that stock can be easily yielding 7% in 5-6 years. At least, that's the idea.

L

oldmanlaurence
Posts: 7
Joined: Tue Jan 12, 2016 2:19 pm

Re: Retiree Dilemma

Post by oldmanlaurence » Thu Jan 14, 2016 6:16 pm

Alex,

Thanks so much. I definitely like the suggestion of laddering into annuities. It gives me a chance to see how my investing for dummies portfolio is working.

I've also gotten:
1. Buy VTI with a portion of my equity mix.
2. REDUCE MY EQUITY holdings. Duh. I got so locked into trying to squeeze yields out of stocks, I forgot that at my age I should maybe be at 30% stocks.
At any rate, I should reduce equities until I can sleep at night no matter what the market does.
3.It's definitely a great idea to buy CD's while I'm waiting to ladder in annuity.
4. If I start with small annuity allotment, I may get more comfortable with market risk.

Thanks (what are SWR and VPW)?

oldmanlaurence
Posts: 7
Joined: Tue Jan 12, 2016 2:19 pm

Re: Retiree Dilemma

Post by oldmanlaurence » Thu Jan 14, 2016 6:34 pm

Hey Lewitt,

I spent 2 months in India this past summer and discovered I could live on $600/month for everything. Dentistry is 30-50% cheaper than Mexico. You can get street food for 75 cents for lunch. Cab ride 60 cents.

So I'm figuring on going back next year for 4 months, and should save $1000/month just being there.

As someone else pointed out Cuenca, Ecuador is also cheap. I've spent 4 months in Panama-which has awesome retiree perks, like no taxes for 20 years if you buy a house, relatively easy residency. A friend rented a brand new top floor 2 bedroom condo with wrap around views in Panama City for $800/mo.

It's an interesting topic. I'd love to find a pool of people to co-operatively rent places. Eg. "Who wants to go in on a four bedroom house in Chang Mai Thailand for 4 months?"

L

User avatar
Phineas J. Whoopee
Posts: 6656
Joined: Sun Dec 18, 2011 6:18 pm

Re: Retiree Dilemma

Post by Phineas J. Whoopee » Thu Jan 14, 2016 6:37 pm

SWR is Sustainable Withdrawal Rate (traditionally misstated as Safe Withdrawal Rate, but it isn't without any risk - using that word is a way to get people emotionally worked up, and it succeeds). An SWR is for planning how much you can draw from your portfolio over the long term without very much risk of depleting it; or alternatively, how much you have to aim at saving to meet a withdrawal goal. People like to argue against spending the specific initial percent (often 4), subsequently adjusted for inflation, ignoring that it's only a planning tool, and never was intended to be an operational method.

VPW is Variable Percentage Withdrawal, an alternative to the Sustainable Withdrawal Rate, which aims to give a retiree more to spend without running out of funds, at the price of potentially having to cut spending drastically when markets are down and if one lives longer than assumed. It may or may not be good, but its stated advantages are relative to the SWR, read planning-only, read pretend spending strategy, rather than relative to any strategy likely to be useful in the messy world we really live in.

That's what the terms mean, with a little of my own commentary thrown in. Feel free to ignore the commentary and just read the Bogleheads wiki articles I linked to.

Given what you've written I'd go with Alex's suggestion in your situation, and partially annuitize using a Single Premium Immediate Annuity (SPIA).

PJW

Post Reply