Use 8.1 % of assets for12.5 monthly income?

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antiqueman
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Use 8.1 % of assets for12.5 monthly income?

Post by antiqueman » Sat May 11, 2019 12:21 pm

Wife and I are 62 and 65.

We are considering using 8.1% of our stock/bonds assets to purchase a nominal annuity. The payout on the annuity would be 12.5 of our monthly income in retirement. For purposes of this question , please ignore inflation.

My wife and I have a pension and social security which presumably will cover inflation. My pension will be paid to my wife if I die first.

Our pension and social security is anticipated to pay about 64.5 percent of our anticipated monthly retirement income needs, With the annuity we would have about 77% of our monthly income satisfied with known fixed income, with the realization that the 12.5 percent is not inflation adjusted.

We will still have a low seven figure assets left if we buy the annuity.


We both have LTC insurance. House is paid for. No debt.

On these facts would you use 8 percent of your liquid assets to purchase 12.5 of your nominal monthly income for life?

Thank you

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Stinky
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Re: Use 8.1 % of assets for12.5 monthly income?

Post by Stinky » Sat May 11, 2019 1:03 pm

antiqueman wrote:
Sat May 11, 2019 12:21 pm
Wife and I are 62 and 65.

We are considering using 8.1% of our stock/bonds assets to purchase a nominal annuity. The payout on the annuity would be 12.5 of our monthly income in retirement. For purposes of this question , please ignore inflation.

My wife and I have a pension and social security which presumably will cover inflation. My pension will be paid to my wife if I die first.

Our pension and social security is anticipated to pay about 64.5 percent of our anticipated monthly retirement income needs, With the annuity we would have about 77% of our monthly income satisfied with known fixed income, with the realization that the 12.5 percent is not inflation adjusted.

We will still have a low seven figure assets left if we buy the annuity.

We both have LTC insurance. House is paid for. No debt.

On these facts would you use 8 percent of your liquid assets to purchase 12.5 of your nominal monthly income for life?

Thank you
Buying a single premium immediate annuity, which I assume you're proposing, is a choice that many folks on this Board agree with. At least in the size range that you're talking about. I'm personally ok with it.

A question back for OP - you say that 77% of your retirement income needs would be met by your pension, SS, and SPIA. Would the remaining 23% be satisfied if you were to apply a reasonable withdrawal rate (say 3%-4%) to your remaining "low seven figure" portfolio after the SPIA purchase?
It's a GREAT day to be alive - Travis Tritt

btenny
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Re: Use 8.1 % of assets for12.5 monthly income?

Post by btenny » Sat May 11, 2019 1:03 pm

If you spend 3% of your investments per month how much of your spending does that cover? Is it 100% or more?

Dontridetheindexdown
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Re: Use 8.1 % of assets for12.5 monthly income?

Post by Dontridetheindexdown » Sat May 11, 2019 1:20 pm

I think you have identified a very logical tactic, as long as it is a single premium immediate annuity (SPIA) from a highly rated insurance company.

Will you use after-tax (savings, taxable investments) or pre-tax (IRA, 401K) assets to purchase the annuity?

If you use after-tax assets, the first 15 years or so of your annuity are mostly return of principal, decreasing each year.

Thus, you will not pay full income tax on the amount you receive each month from the annuity until the out-years.

If you use pre-tax assets to purchase the annuity, you will pay tax on the entire amount received, every year.

However, you will reduce the amount of required minimum distribution (RMD) each year after you reach 70 1/2 because you will have reduced the value of your pre-tax assets.

Our own approach uses both types of funding.

We bought an annuity with after-tax assets for my wife's lifetime.

This will offset her survivor benefit reductions in 2 pensions I receive, if I pre-decease her.

If she pre-deceases me, her annuity ends, and my pensions are not reduced.

We each receive a Social Security Old Age annuity, not much adjustment there if either of us survives the other.

Final plan is to purchase 2 SPIAs (2-life, 100% to survivor) using pre-tax assets just prior to each of us reaching 70 1/2.

Mine will be first (about 25% of our assets), wife will be 4 years later (about 12% of our assets).

We will pay taxes on our annuity income, invest the amount we do not use, and avoid RMDs entirely.

Remaining assets, after-tax (45%) and ROTH (18%) will, hopefully, continue to grow.

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Watty
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Re: Use 8.1 % of assets for12.5 monthly income?

Post by Watty » Sat May 11, 2019 1:24 pm

antiqueman wrote:
Sat May 11, 2019 12:21 pm
...to purchase a nominal annuity
If that means a single premium immediate annuity that will be paid for the rest of your life then it could be reasonable. Sales people tend to call junky high cost annuities all sorts of things so be sure that it is really a SPIA since that is almost always the only type of annuity that people should consider.

My only concern is that it would be that 62 and 65 is on the young side for buying a SPIA. This is especially true if your wife is 62 since women tend to live longer and the payout will be lower because of her age. If a SPIA annuity is right for you then the decision of when to buy it is a separate question.

If one of you is not delaying Social Security until you are 70 then that might be a better option since that is in effect buying an inflation adjusted annuity with better terms than you can get with a commercial annuity. See this web site for suggested claiming strategies.

http://opensocialsecurity.com/
antiqueman wrote:
Sat May 11, 2019 12:21 pm
We will still have a low seven figure assets left if we buy the annuity.
Don't forget that you will be getting at least 2% in dividends and interest from that. That would be at least $20K in income a year in addition to your pension and Social Security. You would only need a SPIA to supplement the total of all three of those.

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Wiggums
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Re: Use 8.1 % of assets for12.5 monthly income?

Post by Wiggums » Sat May 11, 2019 1:42 pm

Stinky wrote:
Sat May 11, 2019 1:03 pm

Buying a single premium immediate annuity, which I assume you're proposing, is a choice that many folks on this Board agree with. At least in the size range that you're talking about. I'm personally ok with it.

A question back for OP - you say that 77% of your retirement income needs would be met by your pension, SS, and SPIA. Would the remaining 23% be satisfied if you were to apply a reasonable withdrawal rate (say 3%-4%) to your remaining "low seven figure" portfolio after the SPIA purchase?
I think response says it all.

dbr
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Re: Use 8.1 % of assets for12.5 monthly income?

Post by dbr » Sat May 11, 2019 1:43 pm

Right Be sure you are maximizing SS and also I think you are a little young yet. I'm not sure an annuity is that helpful when so much of your potential income is already annuitized. On the other hand you are talking about a small enough thing it is probably really neither here nor there. If your pension is not COLA'd I am not sure you want to add even more fixed income that would be at inflation risk. Maybe some years from now you could look at it.


What sort of withdrawal rates from stock and bond assets do your present intentions require.

dbr
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Re: Use 8.1 % of assets for12.5 monthly income?

Post by dbr » Sat May 11, 2019 1:43 pm

Wiggums wrote:
Sat May 11, 2019 1:42 pm
Stinky wrote:
Sat May 11, 2019 1:03 pm

Buying a single premium immediate annuity, which I assume you're proposing, is a choice that many folks on this Board agree with. At least in the size range that you're talking about. I'm personally ok with it.

A question back for OP - you say that 77% of your retirement income needs would be met by your pension, SS, and SPIA. Would the remaining 23% be satisfied if you were to apply a reasonable withdrawal rate (say 3%-4%) to your remaining "low seven figure" portfolio after the SPIA purchase?
I think response says it all.
Yep, asking the same thing.

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antiqueman
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Re: Use 8.1 % of assets for12.5 monthly income?

Post by antiqueman » Sat May 11, 2019 3:39 pm

Buying a single premium immediate annuity, which I assume you're proposing, is a choice that many folks on this Board agree with. At least in the size range that you're talking about. I'm personally ok with it.

A question back for OP - you say that 77% of your retirement income needs would be met by your pension, SS, and SPIA. Would the remaining 23% be satisfied
if you were to apply a reasonable withdrawal rate (say 3%-4%) to your remaining "low seven figure" portfolio after the SPIA purchase?
[/quote]

Yes, the purchase would be a SPIA.

Also, we could cover the remaining 23% need with a 2% to 3% withdrawl.

Topic Author
antiqueman
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Re: Use 8.1 % of assets for12.5 monthly income?

Post by antiqueman » Sat May 11, 2019 3:43 pm

dbr wrote:
Sat May 11, 2019 1:43 pm
Right Be sure you are maximizing SS and also I think you are a little young yet. I'm not sure an annuity is that helpful when so much of your potential income is already annuitized. On the other hand you are talking about a small enough thing it is probably really neither here nor there. If your pension is not COLA'd I am not sure you want to add even more fixed income that would be at inflation risk. Maybe some years from now you could look at it.


What sort of withdrawal rates from stock and bond assets do your present intentions require.
Thank you DBR for your comments.

My present intentions would be to not draw more than 3% of our portfolio if we do not annuitize the additional 8 percent. I probably would use a withdrawl rate of 2% to 3% if I annuitize the additional 8 %. My thought process is that I could probably spend a little more if I annuitize 8% of my current portfolio and use the remaining 92 percent to make withdrawls.

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antiqueman
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Re: Use 8.1 % of assets for12.5 monthly income?

Post by antiqueman » Sat May 11, 2019 3:47 pm

Watty wrote:
Sat May 11, 2019 1:24 pm
antiqueman wrote:
Sat May 11, 2019 12:21 pm
...to purchase a nominal annuity
If that means a single premium immediate annuity that will be paid for the rest of your life then it could be reasonable. Sales people tend to call junky high cost annuities all sorts of things so be sure that it is really a SPIA since that is almost always the only type of annuity that people should consider.

My only concern is that it would be that 62 and 65 is on the young side for buying a SPIA. This is especially true if your wife is 62 since women tend to live longer and the payout will be lower because of her age. If a SPIA annuity is right for you then the decision of when to buy it is a separate question.

If one of you is not delaying Social Security until you are 70 then that might be a better option since that is in effect buying an inflation adjusted annuity with better terms than you can get with a commercial annuity. See this web site for suggested claiming strategies.

http://opensocialsecurity.com/
antiqueman wrote:
Sat May 11, 2019 12:21 pm
We will still have a low seven figure assets left if we buy the annuity.
Don't forget that you will be getting at least 2% in dividends and interest from that. That would be at least $20K in income a year in addition to your pension and Social Security. You would only need a SPIA to supplement the to

Thanks Watty for you response. I

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antiqueman
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Re: Use 8.1 % of assets for12.5 monthly income?

Post by antiqueman » Sat May 11, 2019 3:50 pm

btenny wrote:
Sat May 11, 2019 1:03 pm
If you spend 3% of your investments per month how much of your spending does that cover? Is it 100% or more?
Spending 3% of the remaining portfolio would be more income that I anticipate I would need.

22twain
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Re: Use 8.1 % of assets for12.5 monthly income?

Post by 22twain » Sat May 11, 2019 4:03 pm

antiqueman wrote:
Sat May 11, 2019 12:21 pm
We are considering using 8.1% of our stock/bonds assets to purchase a nominal annuity. The payout on the annuity would be 12.5 of our monthly income in retirement.
How did you decide on that amount to annuitize?
My investing princiPLEs do not include absolutely preserving princiPAL.

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antiqueman
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Re: Use 8.1 % of assets for12.5 monthly income?

Post by antiqueman » Sat May 11, 2019 4:08 pm

I simply decide that X was the most amount of money that I would annuitize. Then I ran the numbers on immediateannuities.com and received the payout amount. Then I added that amount to my other known fixed monthly income payments and arrived at the percentages of how much of my portfolio would be left for other income--hence the 8% and remaining 92%.

Maybe a better way of asking my question is "Could significant harm occur to person if they only annuitized 8%to 10$ of their portfolio"

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Stinky
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Re: Use 8.1 % of assets for12.5 monthly income?

Post by Stinky » Sat May 11, 2019 6:41 pm

antiqueman wrote:
Sat May 11, 2019 3:50 pm
btenny wrote:
Sat May 11, 2019 1:03 pm
If you spend 3% of your investments per month how much of your spending does that cover? Is it 100% or more?
Spending 3% of the remaining portfolio would be more income that I anticipate I would need.
It sounds to me like your plan works.
It's a GREAT day to be alive - Travis Tritt

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Wiggums
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Re: Use 8.1 % of assets for12.5 monthly income?

Post by Wiggums » Sat May 11, 2019 8:32 pm

antiqueman wrote:
Sat May 11, 2019 4:08 pm
I simply decide that X was the most amount of money that I would annuitize. Then I ran the numbers on immediateannuities.com and received the payout amount. Then I added that amount to my other known fixed monthly income payments and arrived at the percentages of how much of my portfolio would be left for other income--hence the 8% and remaining 92%.

Maybe a better way of asking my question is "Could significant harm occur to person if they only annuitized 8%to 10$ of their portfolio"
I can’t of any reason why using 8 to 10% would hurt you.

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willthrill81
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Re: Use 8.1 % of assets for12.5 monthly income?

Post by willthrill81 » Sat May 11, 2019 9:36 pm

antiqueman wrote:
Sat May 11, 2019 3:50 pm
btenny wrote:
Sat May 11, 2019 1:03 pm
If you spend 3% of your investments per month how much of your spending does that cover? Is it 100% or more?
Spending 3% of the remaining portfolio would be more income that I anticipate I would need.
Since 3% has arguably been low enough to be the perpetual withdrawal rate for a balanced asset allocation (i.e. you would never have depleted your portfolio after adjusting for inflation over a 20+ year historic period), there's no way that I'd recommend that you buy a nominal SPIA at this point unless you won't sleep well at night without it.

Despite inflation having been historically low for the last 20 years, $1 from April, 2000, is only worth $.67 today. The purchasing power of a dollar has been cut by a third. And if inflation ramps up again, it could be far worse. The value of a dollar was more than cut in half in the 1970s alone. Inflation risk is a big one to take on when you buy a nominal SPIA. Yes, the payouts are less for a SPIA with a COLA, but they also have significantly less risk, which is why most people are buying a SPIA in the first place.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

dbr
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Re: Use 8.1 % of assets for12.5 monthly income?

Post by dbr » Sun May 12, 2019 8:21 am

Wiggums wrote:
Sat May 11, 2019 8:32 pm
antiqueman wrote:
Sat May 11, 2019 4:08 pm
I simply decide that X was the most amount of money that I would annuitize. Then I ran the numbers on immediateannuities.com and received the payout amount. Then I added that amount to my other known fixed monthly income payments and arrived at the percentages of how much of my portfolio would be left for other income--hence the 8% and remaining 92%.

Maybe a better way of asking my question is "Could significant harm occur to person if they only annuitized 8%to 10$ of their portfolio"
I can’t of any reason why using 8 to 10% would hurt you.
That is true. By the same token it would not particularly help you except perhaps how you feel about your plan. You could do about anything with a single 10% of your assets and it won't have much effect. That would even include just giving it away. If you say that would cut your income by 10% then just increase your withdrawal rate by 10%. Ex-ante there is no way to say there would be any difference to your retirement success.

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antiqueman
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Re: Use 8.1 % of assets for12.5 monthly income?

Post by antiqueman » Sun May 12, 2019 9:53 am

Thank you to everyone who has responded. Your comments have been very helpful and helped me crystalize my thoughts on this issue.

If others have additional comments please provide them.

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antiqueman
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Re: Use 8.1 % of assets for12.5 monthly income?

Post by antiqueman » Sun May 12, 2019 9:59 am

I can’t of any reason why using 8 to 10% would hurt you.
[/quote]

" You could do about anything with a single 10% of your assets and it won't have much effect."


DBR this comment is very helpful, at least to me.

What are your thoughts on how large a percentage of your assets "you could do about anything with..." and it wouldn't affect your retirement. Do you think 10% is the "high "end , or 15% or more?

Again, thank you and others for your thoughts.

ralph124cf
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Re: Use 8.1 % of assets for12.5 monthly income?

Post by ralph124cf » Sun May 12, 2019 10:05 am

As others have said, you seem to be on the young side to be buying an SPIA. Try running the numbers for starting ages of 70 and 75.

Ralph

dbr
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Re: Use 8.1 % of assets for12.5 monthly income?

Post by dbr » Sun May 12, 2019 10:10 am

antiqueman wrote:
Sun May 12, 2019 9:59 am
I can’t of any reason why using 8 to 10% would hurt you.
" You could do about anything with a single 10% of your assets and it won't have much effect."


DBR this comment is very helpful, at least to me.

What are your thoughts on how large a percentage of your assets "you could do about anything with..." and it wouldn't affect your retirement. Do you think 10% is the "high "end , or 15% or more?

Again, thank you and others for your thoughts.
[/quote]

There isn't a line on things like that. The bigger the change the more the effect, but not always. I suppose the only way to analyze such a thing quantitatively is you have to derive the mathematical functional dependence of something you care about on whatever you are changing and then decide by looking at it or on some arbitrary criterion what you think. An example of that is people looking for a relationship in statistical data and saying it is "significant" if there is no more than a 5% chance the result is just random. Of course you can go with a 1% chance, or anything else if you want. Another example is chances of retirement failure as a function of stock allocation in the usual models. At 4% withdrawal rate it doesn't make much difference, a % or two up or down, until stock allocation below 30% or so and then failure rates can balloon up to 15%, 25%, etc. For low withdrawal rates you can't get portfolios to fail at any asset allocation, at least in historical data. If the result is wealth achieved during retirement, the mean wealth is strongly dependent on asset allocation, the more of one the more of the other, etc.

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