Annuity/Pension subsitutes for portfolio

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togb
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Annuity/Pension subsitutes for portfolio

Post by togb » Sun Jun 10, 2018 10:09 am

I don't have a pension, so SS will be the only "set" income once I retire. (And I realize there may be questions whether that will be reduced over current projections). But since I do NOT have a pension, just my portfolio, I'm interested in some ideas of investments that would serve the same purpose as a pension. I'd rather not do an annuity, simply because they are complex and it would be really hard to "get it right" without any expertise in that area. But if that's really the best option, I could tackle getting educated.

I hold some investments that lean towards reliable income-- Vanguards LT corp EFT, Vanguards ST bond EFT. Both are down from when I bought them but they do still generate montly dividends. PONAX is faring a little better. And I have DNP that kicks off 6-7% dividends every month, even it it means part of it is return of principle. I realize that's not idea as an INVESTMENT, but it might play a role in a steady retirement income for someone without out a pension.

But I thought I'd come to the brain trust, for some ideas? I realize I could just draw down cash, or sell investments to generate income, but it would be nice to have something that was more automatic, required less intervention.

grok87
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Re: Annuity/Pension subsitutes for portfolio

Post by grok87 » Sun Jun 10, 2018 12:06 pm

Keep calm and Boglehead on. KCBO.

retiredjg
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Re: Annuity/Pension subsitutes for portfolio

Post by retiredjg » Sun Jun 10, 2018 12:37 pm

I think you are unduly worried about the annuity. Yes, they can be complex, but not the kind you need. It's called a SPIA - single payment immediate annuity. You essentially "buy a pension". You give them money, they send you checks. There are bells and whistles that can be considered but they cost extra.

You would only use a portion of your nest egg for an annuity. The rest can stay invested.

Such an annuity can give you a steady income. The basic ones do not go up with inflation so sometimes people will buy one and then buy another after 10 or 20 years. You can get an idea of what an annuity pays at this website.

https://www.immediateannuities.com

Many people find the steady income comforting. But you can also just set up your own steady income by taking a certain amount out of your nest egg each month.

In the past, taking 4% of a portfolio that contains a reasonable amount of stocks has been highly successful for 30 years (the longest time people that was studied). For example, if your portfolio is $1million when you retire, take $40k the first year. Increase the $40k by inflation for year two - if inflation was 3%, in year 2 you'd take $41.2k and so on. Using this method, there is no reason to reduce spending during bad market years.

Note that this 4% includes everything - federal and state taxes and the 1% fee paid to an advisor if you use one - so you don't get to actually spend the entire $40k on living expenses.

The 4% method is quite conservative. Many people think it is too conservative and it is certainly correct that in many time periods a number higher than 4% does not result in portfolio failure. The trouble is, nobody knows what number is going to be the right number for the next 30 years....

grok87
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Re: Annuity/Pension subsitutes for portfolio

Post by grok87 » Sun Jun 10, 2018 1:05 pm

So i’ll Take a position a little different than retiredjg.
:)
The problem with annuities is that they are not federally guaranteed. In fact they are not strictly speaking even state guaranteed. They are backed by state guarantee funds that will be funded after the fact by assessments on other insurance companies operating in the state. And even that coverGe is limited in dollar terms.

So I would not say simple payout annuities are necessarily a bad idea but that one should be aware of these things and minimize the risks.

My personal plan is roughly as follows:

Build a tips ladder in tax sheltered accounts
Delay social security to age 70
Probably buy some sort of inflation indexed annuity in my 80s. I may have to sell off pArt of my tips ladder to do it.

Other ideas are charitable gift annuities
Last edited by grok87 on Sun Jun 10, 2018 5:58 pm, edited 1 time in total.
Keep calm and Boglehead on. KCBO.

jalbert
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Re: Annuity/Pension subsitutes for portfolio

Post by jalbert » Sun Jun 10, 2018 1:24 pm

One strategy for deciding how much of a SPIA (lifetime income annuity) to purchase is income flooring. You estimate the cost of essential living expenses and cover that with SS and a SPIA. Any remaining assets may be invested in a stock/bond portfolio, that could be moderately conservative to fairly aggressive since essential expenses are covered. One difficulty is that if you don’t get an inflation-adjusted SPIA, you will fall behind the essential expenses over time, and are taking the risk of inflation being higher than expected. But inflation-adjusted SPIAs can cost 40-45% more than a nominal one for a given starting value, and only a few companies offer them.

Delaying the start of SS to age 70 vs starting earlier is equivalent to buying an inflation-adjusted SPIA. Instead of paying for the SPIA, you use those funds to replace income not received from SS while delaying, and you get a larger SS benefit, which is a lifetime inflation-adjusted income stream. This is generally more cost effective than buying a SPIA, and you could buy a smaller SPIA at age 70 if SS will not cover your full expenses then.
Index fund investor since 1987.

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Horton
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Re: Annuity/Pension subsitutes for portfolio

Post by Horton » Sun Jun 10, 2018 2:05 pm

This article by BobK outlines a simple strategy similar to the one grok uses.

https://finpage.blog/2016/12/04/a-three ... -spending/

togb
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Re: Annuity/Pension subsitutes for portfolio

Post by togb » Sun Jun 10, 2018 5:13 pm

grok87 wrote:
Sun Jun 10, 2018 12:06 pm
See this thread
viewtopic.php?f=10&t=245377
This is awesome Grok87, thank you so much! I like the model and the reasoning-- a model is such a helpful place to start! And when it's laid out so well, it's easy to see where to tweak it for my own circumstances. Thanks

togb
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Re: Annuity/Pension subsitutes for portfolio

Post by togb » Sun Jun 10, 2018 5:29 pm

Horton wrote:
Sun Jun 10, 2018 2:05 pm
This article by BobK outlines a simple strategy similar to the one grok uses.

https://finpage.blog/2016/12/04/a-three ... -spending/
Thanks Horton! And thanks everyone-- you've given me a great start to figuring out what will work for me. I had always thought annuities were very mysterious, with lots of pitfalls (high fees, not insured etc and that there were way more bad ones that good options). But that site is great for seeing just what each $100K will get you, and I had no idea that you could get them for the date you wanted, and for shorter terms than the rest of your life. Between the TIPS funds at different maturities, and the possibility of an annuity for a short period, I bet I can figure out something that makes sense for me.
THANK YOU!!

grok87
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Re: Annuity/Pension subsitutes for portfolio

Post by grok87 » Sun Jun 10, 2018 5:50 pm

togb wrote:
Sun Jun 10, 2018 5:13 pm
grok87 wrote:
Sun Jun 10, 2018 12:06 pm
See this thread
viewtopic.php?f=10&t=245377
This is awesome Grok87, thank you so much! I like the model and the reasoning-- a model is such a helpful place to start! And when it's laid out so well, it's easy to see where to tweak it for my own circumstances. Thanks
thanks
Keep calm and Boglehead on. KCBO.

Beehave
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Re: Annuity/Pension subsitutes for portfolio

Post by Beehave » Sun Jun 10, 2018 7:51 pm

There's a scenario in which TIPS fall behind. If they are the main asset in your portfolio it could be a problem.

Example:
If the US debt becomes unpayable through tax receipts, then default or reduced payments become increasingly possible.

In one "reduced payment" scenario, there is inflation, but the government cuts COLAs to below inflation. The debts comprised of non-TIPS-bonds are paid off with dollars discounted in value. TIPS bonds and other inflation-indexed obligations (e.g., Social Security) are paid based on COLAs that are below true inflation. This scenario avoids the traumas of both full- and partial-default, and enables full repayment of debt without either political party having to take responsibility for any painful legislation. So, to me, this is not a far-fetched possibility.

Of course, there are many other possible scenarios. That says to me that diversification is a good idea and makes me leery of major swings in asset allocations.

grok87
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Re: Annuity/Pension subsitutes for portfolio

Post by grok87 » Sun Jun 10, 2018 8:36 pm

Beehave wrote:
Sun Jun 10, 2018 7:51 pm
There's a scenario in which TIPS fall behind. If they are the main asset in your portfolio it could be a problem.

Example:
If the US debt becomes unpayable through tax receipts, then default or reduced payments become increasingly possible.

In one "reduced payment" scenario, there is inflation, but the government cuts COLAs to below inflation. The debts comprised of non-TIPS-bonds are paid off with dollars discounted in value. TIPS bonds and other inflation-indexed obligations (e.g., Social Security) are paid based on COLAs that are below true inflation. This scenario avoids the traumas of both full- and partial-default, and enables full repayment of debt without either political party having to take responsibility for any painful legislation. So, to me, this is not a far-fetched possibility.

Of course, there are many other possible scenarios. That says to me that diversification is a good idea and makes me leery of major swings in asset allocations.
hmm...
I don't want to start a political discussion or policy discussion that may get this thread locked.

But i DO want to correct your statements above that suggest the government could somehow shortchange tips investors by "cut[ting] COLAs to below inflation". Here is a link to the treasury website:

https://www.treasurydirect.gov/instit/s ... srlist.htm
wrote: If, while an inflation-protected security is outstanding, the CPI is (1) discontinued, (2) in the judgment of the Secretary, fundamentally altered in a manner materially adverse to the interests of an investor in the security, or (3) in the judgment of the Secretary, altered by legislation or Executive Order in a manner materially adverse to the interests of an investor in the security, Treasury, after consulting with the BLS, will substitute an appropriate alternative index.
cheers,
grok
Keep calm and Boglehead on. KCBO.

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Horton
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Re: Annuity/Pension subsitutes for portfolio

Post by Horton » Sun Jun 10, 2018 8:52 pm

I would also note that if the government were to default on its obligations - or even if the possibility presented itself - good luck finding shelter among any other asset classes (i.e., diversification wouldn't exist). That would be a terrible scenario.

Beehave
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Re: Annuity/Pension subsitutes for portfolio

Post by Beehave » Sun Jun 10, 2018 9:05 pm

grok87 wrote:
Sun Jun 10, 2018 8:36 pm
Beehave wrote:
Sun Jun 10, 2018 7:51 pm
There's a scenario in which TIPS fall behind. If they are the main asset in your portfolio it could be a problem.

Example:
If the US debt becomes unpayable through tax receipts, then default or reduced payments become increasingly possible.

In one "reduced payment" scenario, there is inflation, but the government cuts COLAs to below inflation. The debts comprised of non-TIPS-bonds are paid off with dollars discounted in value. TIPS bonds and other inflation-indexed obligations (e.g., Social Security) are paid based on COLAs that are below true inflation. This scenario avoids the traumas of both full- and partial-default, and enables full repayment of debt without either political party having to take responsibility for any painful legislation. So, to me, this is not a far-fetched possibility.

Of course, there are many other possible scenarios. That says to me that diversification is a good idea and makes me leery of major swings in asset allocations.
hmm...
I don't want to start a political discussion or policy discussion that may get this thread locked.

But i DO want to correct your statements above that suggest the government could somehow shortchange tips investors by "cut[ting] COLAs to below inflation". Here is a link to the treasury website:

https://www.treasurydirect.gov/instit/s ... srlist.htm
wrote: If, while an inflation-protected security is outstanding, the CPI is (1) discontinued, (2) in the judgment of the Secretary, fundamentally altered in a manner materially adverse to the interests of an investor in the security, or (3) in the judgment of the Secretary, altered by legislation or Executive Order in a manner materially adverse to the interests of an investor in the security, Treasury, after consulting with the BLS, will substitute an appropriate alternative index.
cheers,
grok
Appreciate your response and agree that the only intent here is to discuss whether certain events could be possible and what investments would make sense under those potential conditions. Your mention of protections against artificially low COLAs is very helpful.

MrPotatoHead
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Re: Annuity/Pension subsitutes for portfolio

Post by MrPotatoHead » Sun Jun 10, 2018 10:21 pm

My preferred approach to use the NPV of a CD ladder to buy a ladder and invest the difference.

Two posts on the topic...likely others under my username.

viewtopic.php?f=1&t=240130&p=3757300&hi ... r#p3757300

viewtopic.php?f=1&t=247736&p=3893211&hi ... r#p3893211

MrPotatoHead
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Re: Annuity/Pension subsitutes for portfolio

Post by MrPotatoHead » Sun Jun 10, 2018 10:31 pm

grok87 wrote:
Sun Jun 10, 2018 1:05 pm
So i’ll Take a position a little different than retiredjg.
:)
The problem with annuities is that they are not federally guaranteed. In fact they are not strictly speaking even state guaranteed. They are backed by state guarantee funds that will be funded after the fact by assessments on other insurance companies operating in the state. And even that coverGe is limited in dollar terms.
+ 1

CurlyDave
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Re: Annuity/Pension subsitutes for portfolio

Post by CurlyDave » Mon Jun 11, 2018 4:00 am

IMHO one pays a steep price for demanding a guaranteed income in retirement.

Did anyone guarantee you an inflation-adjusted, never to be reduced paycheck before you retired? I sure didn't have that and yet managed to survive, and even thrive, despite layoffs, hour cutbacks and a few years when raises were non-existent. And, even worse, these things happened when the economy was down, taking looking for a new job off the table.

I keep getting drawn back to the updated Trinity study (2011 by Cooley, et al) linked here https://www.bogleheads.org/wiki/Safe_withdrawal_rates. If one is willing to forego inflation adjustment a 7% withdrawal rate is perfectly reasonable, and the sweet spot looks to be 75% stocks/25% bonds.

Even better, a few mid-course corrections if the portfolio increases seem to allow for higher spending in good times. Unless there are substantial medical advances, after 5 years of retirement, I only need to plan for 25 more years.

DW and I have been following this method for a few years. For a few years our withdrawal rate has been 7%. This year some attention to tax efficiency has led to more like a 6.5% rate, and in two years, when DW's SS starts, that can fall to an even more safe 5.2%. If necessary, we can reduce without great pain but so far things look pretty good.

Dandy
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Re: Annuity/Pension subsitutes for portfolio

Post by Dandy » Mon Jun 11, 2018 7:42 am

The problem with annuities is that they are not federally guaranteed. In fact they are not strictly speaking even state guaranteed. They are backed by state guarantee funds that will be funded after the fact by assessments on other insurance companies operating in the state. And even that coverGe is limited in dollar terms.
The OP was looking for suggestions because he doesn't have a pension. One of the legs in the 3 legged stool. Pensions are not risk free. Many are protected by the Pension Guarantee Program up to a certain amount. True a federal government guarantee seems more reliable than the state annuity "guarantee" process. My point is that annuities shouldn't be dismissed. Many suggest using several highly rated companies instead of one large lump sum to one company to minimize risk. The use of a QLAC annuity can also provide some relief from portfolio withdrawals later in life. For those healthy retirees with a modest portfolio and no pension immediate annuities and/or a QLAC can be very useful.

Simplicity also comes into play. Managing a TIPS ladder and/or making major shifts from bonds to a couple TIPS funds etc. might be asking too much for retirees or their spouses/guardians as they get long into their retirement. Pensions and immediate annuities/QLAC avoid those issues for the most part.

smectym
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Re: Annuity/Pension subsitutes for portfolio

Post by smectym » Tue Jun 12, 2018 1:53 am

OP, to the extent you’re truly annuity-averse, check out Vanguard Managed Payout funds. This product has pluses and minuses, but deliver on providing regular monthly income without undue costs or irrevocable loss of control of assets.

https://investor.vanguard.com/mutual-fu ... ed-payout/#/

However, also consider taking a test drive with a term-certain annuity. With this product, you take a chunk of assets and buy an annuity that pays out over a term you specify. Say you’re 56 and want to bridge the gap to claiming social security at age 66. You buy a 10-year term annuity that generates monthly income roughly akin to a social security check. Mortality isn’t in play. If you die before the 10 year term expires, the income continues to flow to your spouse or other beneficiaries. 15-, 20- and other -year terms are available. In each case you’re guaranteed that the full premium plus interest will be paid to either you or your heirs. Never a scenario where you “lose the bet” by dying too early. That’s not too complicated.

To my knowledge Vanguard is the lowest-cost provider of such annuity solutions. They offer a competitive annuity comparison service:

https://personal.vanguard.com/us/whatwe ... ies/hueler

In short, while complicated and non-transparent annuity products do exist in proliferating abundance (and you’re right to steer clear), relatively simple and relatively lower-cost products may still deserve your attention.

Smectym

grok87
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Re: Annuity/Pension subsitutes for portfolio

Post by grok87 » Tue Jun 12, 2018 6:05 am

Dandy wrote:
Mon Jun 11, 2018 7:42 am
The problem with annuities is that they are not federally guaranteed. In fact they are not strictly speaking even state guaranteed. They are backed by state guarantee funds that will be funded after the fact by assessments on other insurance companies operating in the state. And even that coverGe is limited in dollar terms.
The OP was looking for suggestions because he doesn't have a pension. One of the legs in the 3 legged stool. Pensions are not risk free. Many are protected by the Pension Guarantee Program up to a certain amount. True a federal government guarantee seems more reliable than the state annuity "guarantee" process. My point is that annuities shouldn't be dismissed. Many suggest using several highly rated companies instead of one large lump sum to one company to minimize risk. The use of a QLAC annuity can also provide some relief from portfolio withdrawals later in life. For those healthy retirees with a modest portfolio and no pension immediate annuities and/or a QLAC can be very useful.

Simplicity also comes into play. Managing a TIPS ladder and/or making major shifts from bonds to a couple TIPS funds etc. might be asking too much for retirees or their spouses/guardians as they get long into their retirement. Pensions and immediate annuities/QLAC avoid those issues for the most part.
agree, all good points.
here's a link explaining qlac's
https://www.investopedia.com/terms/q/qu ... t-qlac.asp
i would love to see a true inflation protected qlac
Keep calm and Boglehead on. KCBO.

dbr
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Re: Annuity/Pension subsitutes for portfolio

Post by dbr » Tue Jun 12, 2018 7:22 am

There is no investment that behaves like a pension, certainly not that Vanguard managed payout fund. TIPS ladders have their point but are not a pension, in particular lacking the insurance feature of pooled longevity risk. The equivalent to a pension is an SPIA, which is an insurance product and not an investment.

From a practical point of view it may or may not make sense to buy an SPIA. It would depend on the balance between existing income from SS and how much one needs from investments. It is not recommended making oneself "pension poor" by putting all one's money in SPIAs and it depends on how stressed you are for income. There is also the issue of inflation as true inflation indexed SPIAs are rare and expensive. At least a TIPS ladder takes the bull by the horns on that count, but so also does a 4% rule guided strategy.

The Wizard
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Re: Annuity/Pension subsitutes for portfolio

Post by The Wizard » Tue Jun 12, 2018 9:10 am

dbr wrote:
Tue Jun 12, 2018 7:22 am
There is no investment that behaves like a pension, certainly not that Vanguard managed payout fund. TIPS ladders have their point but are not a pension, in particular lacking the insurance feature of pooled longevity risk. The equivalent to a pension is an SPIA, which is an insurance product and not an investment.

From a practical point of view it may or may not make sense to buy an SPIA. It would depend on the balance between existing income from SS and how much one needs from investments. It is not recommended making oneself "pension poor" by putting all one's money in SPIAs and it depends on how stressed you are for income. There is also the issue of inflation as true inflation indexed SPIAs are rare and expensive. At least a TIPS ladder takes the bull by the horns on that count, but so also does a 4% rule guided strategy.
All pretty much correct.
Any reasonable substitute for annuity/pension is going to have a quite lower payout rate compared to the real thing, 4% (or less) compared to maybe 7%...
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grok87
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Re: Annuity/Pension subsitutes for portfolio

Post by grok87 » Tue Jun 12, 2018 9:43 am

The Wizard wrote:
Tue Jun 12, 2018 9:10 am
dbr wrote:
Tue Jun 12, 2018 7:22 am
There is no investment that behaves like a pension, certainly not that Vanguard managed payout fund. TIPS ladders have their point but are not a pension, in particular lacking the insurance feature of pooled longevity risk. The equivalent to a pension is an SPIA, which is an insurance product and not an investment.

From a practical point of view it may or may not make sense to buy an SPIA. It would depend on the balance between existing income from SS and how much one needs from investments. It is not recommended making oneself "pension poor" by putting all one's money in SPIAs and it depends on how stressed you are for income. There is also the issue of inflation as true inflation indexed SPIAs are rare and expensive. At least a TIPS ladder takes the bull by the horns on that count, but so also does a 4% rule guided strategy.
All pretty much correct.
Any reasonable substitute for annuity/pension is going to have a quite lower payout rate compared to the real thing, 4% (or less) compared to maybe 7%...
so just to state the "obvious", since the OP may not be 100% familiar with how annuities work, the 7% in your example would include some return of principal whereas the 4% would not.
Keep calm and Boglehead on. KCBO.

dbr
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Re: Annuity/Pension subsitutes for portfolio

Post by dbr » Tue Jun 12, 2018 9:59 am

grok87 wrote:
Tue Jun 12, 2018 9:43 am
The Wizard wrote:
Tue Jun 12, 2018 9:10 am
dbr wrote:
Tue Jun 12, 2018 7:22 am
There is no investment that behaves like a pension, certainly not that Vanguard managed payout fund. TIPS ladders have their point but are not a pension, in particular lacking the insurance feature of pooled longevity risk. The equivalent to a pension is an SPIA, which is an insurance product and not an investment.

From a practical point of view it may or may not make sense to buy an SPIA. It would depend on the balance between existing income from SS and how much one needs from investments. It is not recommended making oneself "pension poor" by putting all one's money in SPIAs and it depends on how stressed you are for income. There is also the issue of inflation as true inflation indexed SPIAs are rare and expensive. At least a TIPS ladder takes the bull by the horns on that count, but so also does a 4% rule guided strategy.
All pretty much correct.
Any reasonable substitute for annuity/pension is going to have a quite lower payout rate compared to the real thing, 4% (or less) compared to maybe 7%...
so just to state the "obvious", since the OP may not be 100% familiar with how annuities work, the 7% in your example would include some return of principal whereas the 4% would not.
Yes, it is really critical that people looking for a way to supply income from some assets understand that kind of thing. An SPIA perfectly preserves the principal in the sense that it is zero from the get go. Back at the insurance company they realize that they are paying back money the client gave them in the first place, but the client gives it all up permanently from the start. A TIPS ladder is also not like a portfolio in that the plan is to disburse the maturing principal every year. Of course, a person can raid the remaining principal if needed, but the ladder only works as intended if each rung is liquidated on schedule. 4% rule financing includes raiding the principal but with the difference that in most instances the portfolio will grow in size but in some instances the portfolio will end up being liquidated to zero, just.

rgs92
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Re: Annuity/Pension subsitutes for portfolio

Post by rgs92 » Tue Jun 12, 2018 11:51 am

I like the idea of an SPIA annuity ladder. As your regular portfolio grows, periodically peel some off for an SPIA (in modest amounts like $100,000).
Since, in theory, your portfolio will grow with inflation (or ahead of it), you are locking in these gains with income from "found money."
It's a variation of dollar-cost-averaging. Also, interest rates vary, so you are averaging SPIA returns.

Maybe do this over a period of 10-20 years.

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CWRadio
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Re: Annuity/Pension subsitutes for portfolio

Post by CWRadio » Tue Jun 12, 2018 5:03 pm

When you buy a SPIA what options should you buy? None, cash back, 10 or 20 year guaranteed, joint etc? Trying to understand the pro and con of each option. Thanks. Paul

dbr
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Re: Annuity/Pension subsitutes for portfolio

Post by dbr » Tue Jun 12, 2018 5:14 pm

CWRadio wrote:
Tue Jun 12, 2018 5:03 pm
When you buy a SPIA what options should you buy? None, cash back, 10 or 20 year guaranteed, joint etc? Trying to understand the pro and con of each option. Thanks. Paul
What you should buy depends on you. All the choices are supposed to be actuarially equal. An easy one is the single life vs. joint. If you want the annuity to provide for a couple in spite of the death of one you get a joint annuity or if the survivor does not need or want all the income, a reduced survivor payout. The other issues are just preferences to hedge your bets for one reason or another.

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Re: Annuity/Pension subsitutes for portfolio

Post by The Wizard » Tue Jun 12, 2018 5:43 pm

CWRadio wrote:
Tue Jun 12, 2018 5:03 pm
When you buy a SPIA what options should you buy? None, cash back, 10 or 20 year guaranteed, joint etc? Trying to understand the pro and con of each option. Thanks. Paul
All of my immediate annuities with TIAA are 10 year guaranteed with no silly cash back option.
I'm single nowadays so my annuities are single life. If I was married, I'd probably choose the 2/3 to survivor option...
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Grt2bOutdoors
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Re: Annuity/Pension subsitutes for portfolio

Post by Grt2bOutdoors » Tue Jun 12, 2018 5:44 pm

rgs92 wrote:
Tue Jun 12, 2018 11:51 am
I like the idea of an SPIA annuity ladder. As your regular portfolio grows, periodically peel some off for an SPIA (in modest amounts like $100,000).
Since, in theory, your portfolio will grow with inflation (or ahead of it), you are locking in these gains with income from "found money."
It's a variation of dollar-cost-averaging. Also, interest rates vary, so you are averaging SPIA returns.

Maybe do this over a period of 10-20 years.
It’s not recommended to invest more than half in SPIAs. How many folks do you figure can purchase $1-2 million in annuities over 10-20 years, if it represents half the portfolio value?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: Annuity/Pension subsitutes for portfolio

Post by The Wizard » Tue Jun 12, 2018 5:55 pm

Grt2bOutdoors wrote:
Tue Jun 12, 2018 5:44 pm

It’s not recommended to invest more than half in SPIAs. How many folks do you figure can purchase $1-2 million in annuities over 10-20 years, if it represents half the portfolio value?
I tend to agree with the one-half amount.
A $Million annuitized yields $60k to $70k per year for mid sixties folks.
That may be enough to cover basic expenses nicely...
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togb
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Re: Annuity/Pension subsitutes for portfolio

Post by togb » Tue Jun 12, 2018 6:42 pm

I truly love it when there are so many different perspectives. Sometimes you agree, sometimes polar opposites and sometimes there is some overlap but with differences in strategy. But it all adds a richness to the discussion that I find very helpful.

I'm dumb as a rock about annuities but the SPIA for a term might be something to consider. Some TIPS and CDs could make sense too. The TIPs seem so feeble, but I'll experiment with $10K worth to see what happens and watch for CD rates to a level worth considering. None of it's perfect. But maybe a combination would work. I love figuring it all out, and making something work. And I realize that if I end up being one of those old people who retains a sharp mind, I would do best to have real investments and just sell in alternating years, to take my gains at 0% because I had low income every other year. But I'm also trying to hedge my bets in case my mind leaves before I do.... so some reliable (if suboptimal) income streams would be pretty handy in that circumstance.

I have more things to check on-- thank you!

smectym
Posts: 125
Joined: Thu May 26, 2011 5:07 pm

Re: Annuity/Pension subsitutes for portfolio

Post by smectym » Tue Jun 12, 2018 11:25 pm

rgs92 wrote:
Tue Jun 12, 2018 11:51 am
I like the idea of an SPIA annuity ladder. As your regular portfolio grows, periodically peel some off for an SPIA (in modest amounts like $100,000).
Since, in theory, your portfolio will grow with inflation (or ahead of it), you are locking in these gains with income from "found money."
It's a variation of dollar-cost-averaging. Also, interest rates vary, so you are averaging SPIA returns.

Maybe do this over a period of 10-20 years.
We do some variation of this. Over the years, to defray expenses, we have done several 1035 exchanges from a variable annuity into term-certain SPIA’s. Keeping the term-certain to no more than 10 years mutes long-term inflation risk and makes the monthly payment significantly higher than a life annuity at our current age (eventually, that changes). Yes, each payment includes a partial return of principal. Good from a tax perspective, because the annuitant receives x in monthly income, but the taxable amount is only (x-y), where “y” represents return of principal. Meanwhile, remaining assets continue to grow tax-deferred within the VA.

Smectym

togb
Posts: 95
Joined: Mon Oct 23, 2017 8:36 pm

Re: Annuity/Pension subsitutes for portfolio

Post by togb » Tue Jun 12, 2018 11:47 pm

rgs92 wrote:
Tue Jun 12, 2018 11:51 am
We do some variation of this. Over the years, to defray expenses, we have done several 1035 exchanges from a variable annuity into term-certain SPIA’s. Keeping the term-certain to no more than 10 years mutes long-term inflation risk and makes the monthly payment significantly higher than a life annuity at our current age (eventually, that changes). Yes, each payment includes a partial return of principal. Good from a tax perspective, because the annuitant receives x in monthly income, but the taxable amount is only (x-y), where “y” represents return of principal. Meanwhile, remaining assets continue to grow tax-deferred within the VA.

Smectym
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It strikes me that your reasons for liking the term certain SPIA's are pretty closely aligned to why I like DNP. It pays every month like clockwork. Sometimes that payment includes return of principal. But then I'm not taxed on that part. This is really what triggered my question-- wondered if anyone else had positions in their portfolio that was like a fake annuity. Not that I think DNP is the equivalent-- just that it's an investment option to get a monthly paycheck. I tend to like diversification but when I see that I have monthly dividends from DNP and 3 other positions, it got me thinking this could be a strategy.

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