Pension alternatives

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togb
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Pension alternatives

Post by togb » Wed Sep 12, 2018 10:36 pm

I start this thread assuming it will be a debate, and that most of you will not like my idea. I'm okay with this because critique, more ideas, opinions and perspectives to consider can usually drive decision quality.

I don't have a pension. I will have social security. I would like additional steady income for at least part of my retirement. I've taken a quick look at annuities, and I think the amount of money you get back is pretty ho hum. You trade a lot of return for that security.

So the other night , I was reviewing my (one) rental property. My cash investment was right at 40K, and I'm creating net income of about $5K/year. It made me think, hey if I put $200K in an annuity, I get back peanuts. If I put $200K in another 4 rental properties, I bet I can get at least $15K a year from the additional properties, so now up to $20K off rental investments. (I'm assuming that I only get $$ from 4 of the 5, to allow for any vacancies and building more reserves for repairs, etc). Now I do know this will require some work from me, or to hire property managers and that would reduce the net $$$. But bottom line, $200K would go further on real estate than on an annuity, if I'm willing to do a little work. (I've always worked so this doesn't scare me.) The additional upside is potential appreciation; the downside is all the depreciation is recaptured as taxable income so there some trickiness in figuring that out taxwise)

Now the other obvious alternative is equities that pay dividends. In today's market, probably pretty reasonable to find high quality equities that would yield 3% and have potential upside. That would not require as much work as having 5 rentals. But it's not nearly the return as putting down 20% on four more cash generating rentals.

Reactions? Critique? Advice? Things to consider?

Nate79
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Re: Pension alternatives

Post by Nate79 » Wed Sep 12, 2018 10:46 pm

togb wrote:
Wed Sep 12, 2018 10:36 pm
I start this thread assuming it will be a debate, and that most of you will not like my idea. I'm okay with this because critique, more ideas, opinions and perspectives to consider can usually drive decision quality.

I don't have a pension. I will have social security. I would like additional steady income for at least part of my retirement. I've taken a quick look at annuities, and I think the amount of money you get back is pretty ho hum. You trade a lot of return for that security.

So the other night , I was reviewing my (one) rental property. My cash investment was right at 40K, and I'm creating net income of about $5K/year. It made me think, hey if I put $200K in an annuity, I get back peanuts. If I put $200K in another 4 rental properties, I bet I can get at least $15K a year from the additional properties, so now up to $20K off rental investments. (I'm assuming that I only get $$ from 4 of the 5, to allow for any vacancies and building more reserves for repairs, etc). Now I do know this will require some work from me, or to hire property managers and that would reduce the net $$$. But bottom line, $200K would go further on real estate than on an annuity, if I'm willing to do a little work. (I've always worked so this doesn't scare me.) The additional upside is potential appreciation; the downside is all the depreciation is recaptured as taxable income so there some trickiness in figuring that out taxwise)

Now the other obvious alternative is equities that pay dividends. In today's market, probably pretty reasonable to find high quality equities that would yield 3% and have potential upside. That would not require as much work as having 5 rentals. But it's not nearly the return as putting down 20% on four more cash generating rentals.

Reactions? Critique? Advice? Things to consider?
Let's say you are mid 70s and become limited mobility. How is this rental ownership, which is a job, going to work for you?

Lets say you want to do some extended travel, how are you going to manage your rentals?

MathIsMyWayr
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Re: Pension alternatives

Post by MathIsMyWayr » Wed Sep 12, 2018 11:24 pm

What will you do if one of your tenants is a single mother with young kids and is going through a financial trouble?

stimulacra
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Re: Pension alternatives

Post by stimulacra » Thu Sep 13, 2018 12:04 am

Have you considered creating your own personal pension (via defined contribution plans and/or SWR-type portfolios)?

BTW… most people don't have a traditional pension (i.e. Defined benefit retirement plans) but most people do have access to some type of defined contribution plans.

Do you have 401k's or IRA's? What are your other assets? What is your age?

3504PIR
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Re: Pension alternatives

Post by 3504PIR » Thu Sep 13, 2018 12:09 am

Why not get 20? I’m not a huge fan of using leverage in something as important as retirement, at least not to that extent.
Last edited by 3504PIR on Thu Sep 13, 2018 12:17 am, edited 1 time in total.

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Watty
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Re: Pension alternatives

Post by Watty » Thu Sep 13, 2018 12:15 am

togb wrote:
Wed Sep 12, 2018 10:36 pm
Things to consider?
1) If you were planning on financing the purchase you may not be able to get loans to buy four houses.

2) How is this any different than just buying a REIT?

Valuethinker
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Re: Pension alternatives

Post by Valuethinker » Thu Sep 13, 2018 4:04 am

togb wrote:
Wed Sep 12, 2018 10:36 pm
I start this thread assuming it will be a debate, and that most of you will not like my idea. I'm okay with this because critique, more ideas, opinions and perspectives to consider can usually drive decision quality.

I don't have a pension. I will have social security. I would like additional steady income for at least part of my retirement. I've taken a quick look at annuities, and I think the amount of money you get back is pretty ho hum. You trade a lot of return for that security.

So the other night , I was reviewing my (one) rental property. My cash investment was right at 40K, and I'm creating net income of about $5K/year. It made me think, hey if I put $200K in an annuity, I get back peanuts. If I put $200K in another 4 rental properties, I bet I can get at least $15K a year from the additional properties, so now up to $20K off rental investments. (I'm assuming that I only get $$ from 4 of the 5, to allow for any vacancies and building more reserves for repairs, etc). Now I do know this will require some work from me, or to hire property managers and that would reduce the net $$$. But bottom line, $200K would go further on real estate than on an annuity, if I'm willing to do a little work. (I've always worked so this doesn't scare me.) The additional upside is potential appreciation; the downside is all the depreciation is recaptured as taxable income so there some trickiness in figuring that out taxwise)

Now the other obvious alternative is equities that pay dividends. In today's market, probably pretty reasonable to find high quality equities that would yield 3% and have potential upside. That would not require as much work as having 5 rentals. But it's not nearly the return as putting down 20% on four more cash generating rentals.

Reactions? Critique? Advice? Things to consider?
You need to be sure you can ride another crash.

So in housing. What happened to house prices in your chosen area during the Crash? What happened to rents and to vacancies?

You would be betting your eggs on one small basket. Lots to go wrong.

What happens if a property becomes blighted or needs extensive repairs? If interest rates rise?

If you stress test the property portfolio and you feel that you can manage it, then that will work. As debt is paid down, the portfolio will generate free cash flow.

Property is a "great way to get rich slowly". If you put the work in to build up a portfolio, pre retirement, it can generate a living post retirement.

One issue is health/ time in retirement. Managing rental properties can be stress-- evictions, emergency repairs, calls in the middle of the night, etc. You might manage this at 65, at 75 it could be a real issue. And you are not fully in control of that.

Annuity rates *are* low, although they may rise with higher interest rates.

Stock portfolio:

- dividends are not certain - there are big cuts in a downturn. One can become reliant on a very few stocks for the dividend income. I don't know the number for Exxon-Mobil in the US market, but BP was 25% of all dividends paid by UK companies, and then Deepwater Horizon happened and it went to zero. Royal Dutch Shell, post its takeover of BG, is 40% of the value of all dividends paid by FTSE index companies

- REITs have US tax challenges, I gather ("non qualifying" dividends? Sorry not a US taxpayer). They are also very volatile, more so than S&P 500 as a whole. Many REITs in the crash went to paying dividends in stock or cut dividends. REITs are inherently leveraged (it's their business model, to borrow money to finance property purchases) so again, a debt-deflation meltdown a la 2008-09, or soaring interest rates a la 1979-81, is going to hurt like heck

If you look at Burton Malkiel's book, David Swensen then there are model portfolios with high REIT weightings. I would say more than 20% is quite risky, but certainly 20% would work. Something like 40% stocks 40% bonds 20% REITs -- assuming you can get the taxable locations right. I shudder at what 2008-09 would have done to that portfolio but to be fair, it did recover.

I still favour annuities-- annuitize to cover basic expenses in retirement for example. The longer you wait the better your position in terms of mortality credit, so this is something you may wish to defer until age 70 or later. Also if you buy a fixed annuity (i.e. non inflation indexed) the longer you wait, the better - reduces inflation risk. Conversely, deferring Social Security is the best inflation hedge you can buy (as I understand the current US SSA rules on increases due to deferral which are "actuarially fair" but on an average life expectancy and using a discount rate which is no longer current?).

A related complication is your position vis-a-vis having a (female) spouse. Women in America who are in a position to have private pension income (therefore relatively affluent) have pretty extraordinary life expectancies as I understand the position. Me having 4 female relations alive over 90.

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mhc
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Re: Pension alternatives

Post by mhc » Thu Sep 13, 2018 9:36 am

Owning only 5 rentals does not provide very much diversification, especially if they are in one market. This comes with uncompensated risk.

I have been a landlord before. I prefer mutual funds. Much easier to manage. They don't call me at 10:00 PM on a Friday night about a plumbing issue.

There are many people who do just fine with rentals. It is just not for me.

togb
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Re: Pension alternatives

Post by togb » Thu Sep 13, 2018 11:10 pm

[/quote]

Let's say you are mid 70s and become limited mobility. How is this rental ownership, which is a job, going to work for you?

Lets say you want to do some extended travel, how are you going to manage your rentals?
[/quote]

Actually I don't do any of the "work" on the rental now. I intentionally bought new construction to avoid most maintenance, but when something comes up, I hire professionals. My part of the work is to find/buy properties, advertise and select the tenant. I run credit, background, etc and am very stringent. I'm offering one of the nicest properties, so I have been able to attract some of the best tenants.

Extended travel. Wow, that would be so nice. But I have other things that typically prevent that.

That said, if I got more properties, I'd bite the bullet and get a property manager. Great points though-- I need to run the numbers to ensure they still make sense even with 10% of the rent going to a property manager.

togb
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Re: Pension alternatives

Post by togb » Thu Sep 13, 2018 11:22 pm

stimulacra wrote:
Thu Sep 13, 2018 12:04 am
Have you considered creating your own personal pension (via defined contribution plans and/or SWR-type portfolios)?

BTW… most people don't have a traditional pension (i.e. Defined benefit retirement plans) but most people do have access to some type of defined contribution plans.

Do you have 401k's or IRA's? What are your other assets? What is your age?
I have a 401K with current employer (mostly BT, some Roth), main IRA (rolled over from previous employer), plus a Roth. Reasonable equity in primary residence--when I sell, I should be able to buy next home without financing. Probably 80K equity in rental house, which will go to brokerage account (and piecemeal to Roth if I sell while I can still contribute). The only debt is a couple more years paying on my car, at 0% interest.

I'm 60, and hope to retire in the next 5 years.

togb
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Re: Pension alternatives

Post by togb » Thu Sep 13, 2018 11:29 pm

A related complication is your position vis-a-vis having a (female) spouse. Women in America who are in a position to have private pension income (therefore relatively affluent) have pretty extraordinary life expectancies as I understand the position. Me having 4 female relations alive over 90.

:happy No spouse.
and I'm actually female, so could have a longer life expectancy

Thanks for your many excellent points. Key takeaways are to compare a REIT component, explore diverse areas for additional properties. And I'm also starting to think I"ve been really lucky on this single rental home. The same market that drove $50K appreciation in value, have eliminated my change to buy another where the numbers work as well. And I promised myself if I can't buy it right, I wait-- you can never make it right if you overpay going in.

rgs92
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Re: Pension alternatives

Post by rgs92 » Thu Sep 13, 2018 11:52 pm

In the beginning, you say:
If I put $200K in another 4 rental properties, I bet I can get at least $15K a year from the additional properties

If you buy a fixed annuity, you will get about $1,000 a month ($12K a year) which is not that far off from $15K without all the associated expenses.

dknightd
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Re: Pension alternatives

Post by dknightd » Fri Sep 14, 2018 7:11 am

We'll be buying an SPIA. Easy and relatively safe. We'll probably use about 25% of our savings. Together with SS that should cover our basic expenses.

bradpevans
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Re: Pension alternatives

Post by bradpevans » Fri Sep 14, 2018 7:29 am

dknightd wrote:
Fri Sep 14, 2018 7:11 am
We'll be buying an SPIA. Easy and relatively safe. We'll probably use about 25% of our savings. Together with SS that should cover our basic expenses.
Another vote for SPIA in lieu of a pension. Much more stable / less complicated than real estate. Real estate does offer the potential for much higher returns; with a SPIA you now exactly what you will be getting

grok87
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Re: Pension alternatives

Post by grok87 » Fri Sep 14, 2018 7:31 am

Keep calm and Boglehead on. KCBO.

Valuethinker
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Re: Pension alternatives

Post by Valuethinker » Fri Sep 14, 2018 8:50 am

bradpevans wrote:
Fri Sep 14, 2018 7:29 am
dknightd wrote:
Fri Sep 14, 2018 7:11 am
We'll be buying an SPIA. Easy and relatively safe. We'll probably use about 25% of our savings. Together with SS that should cover our basic expenses.
Another vote for SPIA in lieu of a pension. Much more stable / less complicated than real estate. Real estate does offer the potential for much higher returns; with a SPIA you now exactly what you will be getting
2 issues (I am a big fan of SPIAs, but just to outline these):

- there is "adverse selection" against you on SPIAs - people who buy annuities live longer than the average. That's one reason why the average company pension is better than the SPIA you could buy with the equivalent lump sum

- most SPIAs in the USA are not inflation indexed? In the very long run (your spouse counts; remember a middle class American woman aged 65 now, could easily live to be 95, the decline in life expectancy has generally come in the lower socio-economic groups, I believe, but not those in the upper 5 deciles of income) inflation is a big risk.

The hedge for this, such as it is, is to defer taking US Social Security-- thus leading to a higher inflation indexed starting payment. There are interactions (with which I am not familiar) for spouses in terms of when to take SS.

I think we should not underestimate the impact of declining mental acuity and physical health. I saw it with my father. The portfolio (e.g. an SPIA) offers a "fire and forget" approach.

With rising US interest rates SPIAs may become more attractive.

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nedsaid
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Re: Pension alternatives

Post by nedsaid » Fri Sep 14, 2018 9:02 am

togb wrote:
Wed Sep 12, 2018 10:36 pm
I start this thread assuming it will be a debate, and that most of you will not like my idea. I'm okay with this because critique, more ideas, opinions and perspectives to consider can usually drive decision quality.

I don't have a pension. I will have social security. I would like additional steady income for at least part of my retirement. I've taken a quick look at annuities, and I think the amount of money you get back is pretty ho hum. You trade a lot of return for that security.

So the other night , I was reviewing my (one) rental property. My cash investment was right at 40K, and I'm creating net income of about $5K/year. It made me think, hey if I put $200K in an annuity, I get back peanuts. If I put $200K in another 4 rental properties, I bet I can get at least $15K a year from the additional properties, so now up to $20K off rental investments. (I'm assuming that I only get $$ from 4 of the 5, to allow for any vacancies and building more reserves for repairs, etc). Now I do know this will require some work from me, or to hire property managers and that would reduce the net $$$. But bottom line, $200K would go further on real estate than on an annuity, if I'm willing to do a little work. (I've always worked so this doesn't scare me.) The additional upside is potential appreciation; the downside is all the depreciation is recaptured as taxable income so there some trickiness in figuring that out taxwise)

Now the other obvious alternative is equities that pay dividends. In today's market, probably pretty reasonable to find high quality equities that would yield 3% and have potential upside. That would not require as much work as having 5 rentals. But it's not nearly the return as putting down 20% on four more cash generating rentals.

Reactions? Critique? Advice? Things to consider?
No easy answers here. My first thought was do you really want to be an elderly landlord? Rentals do require assertiveness with renters and upkeep on the properties. Sweat equity is involved here. Some folks are cut out to be landlords and others are not. We often discuss here the issue of cognitive decline in old age and this also gives me pause about rental properties.
A fool and his money are good for business.

bradpevans
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Re: Pension alternatives

Post by bradpevans » Fri Sep 14, 2018 9:16 am

Valuethinker wrote:
Fri Sep 14, 2018 8:50 am
bradpevans wrote:
Fri Sep 14, 2018 7:29 am
dknightd wrote:
Fri Sep 14, 2018 7:11 am
We'll be buying an SPIA. Easy and relatively safe. We'll probably use about 25% of our savings. Together with SS that should cover our basic expenses.
Another vote for SPIA in lieu of a pension. Much more stable / less complicated than real estate. Real estate does offer the potential for much higher returns; with a SPIA you now exactly what you will be getting
2 issues (I am a big fan of SPIAs, but just to outline these):

- there is "adverse selection" against you on SPIAs - people who buy annuities live longer than the average. That's one reason why the average company pension is better than the SPIA you could buy with the equivalent lump sum

- most SPIAs in the USA are not inflation indexed? In the very long run (your spouse counts; remember a middle class American woman aged 65 now, could easily live to be 95, the decline in life expectancy has generally come in the lower socio-economic groups, I believe, but not those in the upper 5 deciles of income) inflation is a big risk.

The hedge for this, such as it is, is to defer taking US Social Security-- thus leading to a higher inflation indexed starting payment. There are interactions (with which I am not familiar) for spouses in terms of when to take SS.

I think we should not underestimate the impact of declining mental acuity and physical health. I saw it with my father. The portfolio (e.g. an SPIA) offers a "fire and forget" approach.

With rising US interest rates SPIAs may become more attractive.
The *retirement* planners I met with were very big on SPIAs as a way to guarantee an income stream. The were also very direct and honest about cognitive decline. They had software to run scenarios starting with spendable dollars per year, then figuring out how much to draw from what accounts when in order to meet the spend need while minimizing the tax hit and maximizing the life of the portfolio (i.e longevity risk)

I hadn't thought of "selection bias" with regard to SPIAs, but I can't dispute the logic. My assumption was more that a workplace pension was set up as an employee benefit and so might be "better" than on the open market.

stimulacra
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Re: Pension alternatives

Post by stimulacra » Fri Sep 14, 2018 9:35 am

togb wrote:
Thu Sep 13, 2018 11:22 pm
stimulacra wrote:
Thu Sep 13, 2018 12:04 am
Have you considered creating your own personal pension (via defined contribution plans and/or SWR-type portfolios)?

BTW… most people don't have a traditional pension (i.e. Defined benefit retirement plans) but most people do have access to some type of defined contribution plans.

Do you have 401k's or IRA's? What are your other assets? What is your age?
I have a 401K with current employer (mostly BT, some Roth), main IRA (rolled over from previous employer), plus a Roth. Reasonable equity in primary residence--when I sell, I should be able to buy next home without financing. Probably 80K equity in rental house, which will go to brokerage account (and piecemeal to Roth if I sell while I can still contribute). The only debt is a couple more years paying on my car, at 0% interest.

I'm 60, and hope to retire in the next 5 years.
You might be able to get more specific help from the forum here if you provided a more detail picture of your current situation and what you would require in retirement. You can do a search for “Portfolio Critique” to see the type and amount of info you might want to provide.

Valuethinker
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Re: Pension alternatives

Post by Valuethinker » Fri Sep 14, 2018 9:56 am

bradpevans wrote:
Fri Sep 14, 2018 9:16 am
Valuethinker wrote:
Fri Sep 14, 2018 8:50 am
bradpevans wrote:
Fri Sep 14, 2018 7:29 am
dknightd wrote:
Fri Sep 14, 2018 7:11 am
We'll be buying an SPIA. Easy and relatively safe. We'll probably use about 25% of our savings. Together with SS that should cover our basic expenses.
Another vote for SPIA in lieu of a pension. Much more stable / less complicated than real estate. Real estate does offer the potential for much higher returns; with a SPIA you now exactly what you will be getting
2 issues (I am a big fan of SPIAs, but just to outline these):

- there is "adverse selection" against you on SPIAs - people who buy annuities live longer than the average. That's one reason why the average company pension is better than the SPIA you could buy with the equivalent lump sum

- most SPIAs in the USA are not inflation indexed? In the very long run (your spouse counts; remember a middle class American woman aged 65 now, could easily live to be 95, the decline in life expectancy has generally come in the lower socio-economic groups, I believe, but not those in the upper 5 deciles of income) inflation is a big risk.

The hedge for this, such as it is, is to defer taking US Social Security-- thus leading to a higher inflation indexed starting payment. There are interactions (with which I am not familiar) for spouses in terms of when to take SS.

I think we should not underestimate the impact of declining mental acuity and physical health. I saw it with my father. The portfolio (e.g. an SPIA) offers a "fire and forget" approach.

With rising US interest rates SPIAs may become more attractive.
The *retirement* planners I met with were very big on SPIAs as a way to guarantee an income stream. The were also very direct and honest about cognitive decline. They had software to run scenarios starting with spendable dollars per year, then figuring out how much to draw from what accounts when in order to meet the spend need while minimizing the tax hit and maximizing the life of the portfolio (i.e longevity risk)
Because of the "depletion of capital" element SPIAs are very much neglected by investors. There's a whole literature regarding the underutilization of SPIAs, in the research on behavioural investing.

We prefer a capital lump sum to a future income stream, even though the latter is generally better for us. That's in part, perhaps, the Endowment Effect.
I hadn't thought of "selection bias" with regard to SPIAs, but I can't dispute the logic. My assumption was more that a workplace pension was set up as an employee benefit and so might be "better" than on the open market.
It think it is an actuarial "truth" by which I mean:

Pension funds are heavily governed by government regulation re actuarial assumptions & also by practice & ethics of actuarial science profession.

US pension funds also have different rules public re private. I believe Congress has mandated some convergence on this, thus revealing that US public sector pension funds have made expensive future promises. Warren Buffett as long as 15 years ago was writing about unrealistic return assumptions in US (public and private) pension funds.

So yes a pension fund has risk pooling, whereas individual annuitants live longer than average (whether longer than average of a corporate pension scheme member I don't know) and thus adverse selection from the point of view of the insurance company.

togb
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Re: Pension alternatives

Post by togb » Fri Sep 14, 2018 4:12 pm

rgs92 wrote:
Thu Sep 13, 2018 11:52 pm
In the beginning, you say:
If I put $200K in another 4 rental properties, I bet I can get at least $15K a year from the additional properties

If you buy a fixed annuity, you will get about $1,000 a month ($12K a year) which is not that far off from $15K without all the associated expenses.
Seriously? I must not have shopped annuities at the right place. If I thought I could have an annuity that was returning 6%, I'd do it in a heartbeat. Where would I find such a beast?

grok87
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Re: Pension alternatives

Post by grok87 » Fri Sep 14, 2018 4:16 pm

togb wrote:
Fri Sep 14, 2018 4:12 pm
rgs92 wrote:
Thu Sep 13, 2018 11:52 pm
In the beginning, you say:
If I put $200K in another 4 rental properties, I bet I can get at least $15K a year from the additional properties

If you buy a fixed annuity, you will get about $1,000 a month ($12K a year) which is not that far off from $15K without all the associated expenses.
Seriously? I must not have shopped annuities at the right place. If I thought I could have an annuity that was returning 6%, I'd do it in a heartbeat. Where would I find such a beast?
In general I am in favor of liability matching strategies like annuites, tips-ladders, etc. but you should know that part of the 6% annuity “return” is not really return but “return of principal”.
Keep calm and Boglehead on. KCBO.

james22
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Re: Pension alternatives

Post by james22 » Fri Sep 14, 2018 11:42 pm

BAC-L and WFC-L

See the 14th post for an annuity comparison:

http://boards.fool.com/a-value-opportun ... sort=whole
This whole episode is likely to end so badly that future children will learn about it in school and shake their heads in wonder at the rank stupidity of it all... Hussman

heyyou
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Re: Pension alternatives

Post by heyyou » Sat Sep 15, 2018 1:21 am

OP, sounds like you want more income from your current portfolio.
Real estate is due for another crash, since its growth from the previous crash.

My opinion is to work on adjusting your expenses to your projected retirement income instead of trying to garner more from your current assets. Can you find a retiree sized job? Scott Burns noted that a $1000 a month job, paid as much as taking 4% annually from $300k in a stock/bond fund portfolio.

Stormbringer
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Re: Pension alternatives

Post by Stormbringer » Sat Sep 15, 2018 9:54 am

It's always puzzled me that people generally like pensions and social security, but turn their noses up at SPIAs. In the absence of a pension, I really like the idea of using SS + annuity to create an income floor to protect against bad times.
"Compound interest is the most powerful force in the universe." - Albert Einstein

Johnsson
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Re: Pension alternatives

Post by Johnsson » Sat Sep 15, 2018 11:06 am

We've had rentals for ~30 years. We've always had a manager (I learned young, managing my parents rentals that I did no want to do it myself).

Our returns have been similar to yours.

We're now 57 and planning to sell what we have. Even with a manager there's always a problem around the next corner (tomorrow, 4 months from now, who knows...), sometimes very expensive.

I'm tired of it. Planning to sell over the next few years and maybe go into an REIT, then again, maybe not.

Almost there
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Re: Pension alternatives

Post by Almost there » Sat Sep 15, 2018 11:55 am

James22 wrote:
BAC-L and WFC-L

See the 14th post for an annuity comparison:

http://boards.fool.com/a-value-opportun ... sort=whole
I clicked on above and the discussion was about stock. How do I find the annuity comparison?

Almost there

grok87
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Re: Pension alternatives

Post by grok87 » Sat Sep 15, 2018 12:02 pm

Almost there wrote:
Sat Sep 15, 2018 11:55 am
James22 wrote:
BAC-L and WFC-L

See the 14th post for an annuity comparison:

http://boards.fool.com/a-value-opportun ... sort=whole
I clicked on above and the discussion was about stock. How do I find the annuity comparison?

Almost there
here it is
wrote:

The kicker? For $298k this annuity would generate $12k/year (~4% yield). Our much-discussed WFC/L is currently above 6% yield,
so perhaps you could avoid the financial planner and do considerably better?

The difference is far more than it appears in that comparison.
In one case it's a yield, and in the other case it's mostly return of capital.

Let's say you go for one or the other deal today for $298k, inflation is 2%/year, and you croak 20 years from today.
WFC/PL is trading at $1199.60 today. Let's call it $1200, so the $75 coupon is exactly 6.25%.

Between you and your estate, how much do you get from the annuity?
For annuities I believe that only a very small and changing portion of the amount is taxable for Americans. Let's say 5% just so we don't ignore it?
So, you receive $12k payments for 20 years or $240k, which after inflation equates to $190710 in today's money.
After tax, that's around $181794 in today's money, which is 60.8% of your original money.
The other 39.4% of your money (in purchasing power) is lost and gone forever.
Even with zero tax and living to 103, you have had a negative real return on your money after 38 years.
Only in year 39 do you start to come out ahead on the deal, at age 104, and your rate of return at that point is less than 0.1%/year.

If you buy WFC/PL instead, you get 248.33 shares, paying a coupon of $75, total $18625/year pretax.
Let's assume you're US based and a top tax bracket kind of guy and pay 23.8%, so that's net $14192 per year after tax in today's dollars.
So, your real after-tax return after 20 years to your assumed death gets you $225550 in coupons overall in today's money, which is 18% more than the annuity gave you.
But...and here is the kicker...your estate still owns the preferred stock.
Assuming the price is still $1200 in then-current dollars, it's worth $741.77 per share in
today's dollars or $184206. There is no capital gains due if it's sold, as the nominal price hasn't changed.
Losing 2%/year in value to inflation is a lot better than losing it all.

So, after 20 years you (including your estate) end up putting in $298000 and end up with either
* $181794 total back in today's money from the annuity, after taxes and inflation
* $409756 total back in today's money from the WFC/PL, after taxes and inflation

The thing to remember about an annuity is that you are not *investing* that money.
It is an insurance premium expense, and once given over to the insurer, the principal never comes back to you.
Thus the payments are not a yield at all, but little steps back up out of that really big initial hole.
They are priced so badly that you have to live a *really* long time for it to be better than simply running down the pile of cash it would have cost you.
(that $298000, again without inflation protection or any return at all, will obviously last 24.8 years at a $12k/year rundown rate as there is no tax)


A disadvantage of the WFC/PL in these really long scenarios is that it's not perpetual.
There is the likelihood that each WFC/PL that cost you $1200 will get forcibly exchanged for $1300 worth of WFC common stock...eventually. Maybe 16-25 years out?
Your earnings yield is probably going to be a bit lower on the common than than the yield on the preferred, and "payments" will
get irregular (selling bits of stock when the market value of the block rises in real terms above its initial level).
But it does mean that you start getting inflation protection from that point onwards.
Hardly a wipe-out.

Previously I have suggested to people to use a mix of mainly WFC/PL for yield and a little WFC common to "insure" against the forced conversion.
The only scenario that you get the forced conversion is the scenario wherein WFC has gone up by 3.5 from today's price,
so when you eventually lose yield from the WFC/PL you have done wonderfully on the WFC common.
On certain assumptions a portfolio of 1/3 WFC and 2/3 WFC/PL would keep your yield from dropping below
its initial nominal level when the conversion happens, which is 4.90% pretax at current prices and yields.
You also get a material amount of inflation protection on your coupons, though not complete.

Jim

do ctrl-f 228431
on this link
http://boards.fool.com/a-value-opportun ... sort=whole
Keep calm and Boglehead on. KCBO.

Almost there
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Location: Arizona USA

Re: Pension alternatives

Post by Almost there » Sat Sep 15, 2018 12:05 pm

Thank you.

Almost there

TN_Boy
Posts: 542
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Re: Pension alternatives

Post by TN_Boy » Sat Sep 15, 2018 12:12 pm

Stormbringer wrote:
Sat Sep 15, 2018 9:54 am
It's always puzzled me that people generally like pensions and social security, but turn their noses up at SPIAs. In the absence of a pension, I really like the idea of using SS + annuity to create an income floor to protect against bad times.
And I'm always surprised when people are puzzled that folks are hesitant about SPIA while they like SS and pensions!

SPIAs often make sense. But why wouldn't people react differently to SS/pensions and SPIAs? Pension and SS benefits show up "magically" after many years of payroll deductions. You certainly notice the deductions, but they are a relatively small (for most people) reduction in your take-home pay. And certainly the SS deduction, at least, is not optional. The deductions are a defacto part of your budget.

But to get a decent sized payment from an SPIA, I am going to have to write somebody a six figure check. That's a big check. And that money is gone forever (for the simplest SPIAs), whether I die the next month (at which point I wouldn't care) or whether I have a financial crisis of some sort and would like that money back to be spent as a lump sum. Plus, most SPIAs pay out in nominal dollars (inflation adjusted ones pay out quite a bit less early, right?) and so will be worth less as time goes on (unlike SS).

And since you need a large check to get a decent sized payment, I don't see an SPIA as useful to anybody that doesn't have a fairly big investment portfolio. If you've only saved 50k or 100k, you probably don't want to take money out of those savings to get an SPIA.

And finally you have other factors, like if the insurer you buy from goes bankrupt, how will that play out, etc.

We will take a hard look at SPIAs down the road, but rightly or wrongly it seems "clear" to me why they are not more loved, in spite of the potential advantages of an income stream unaffected by market returns.

randomguy
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Re: Pension alternatives

Post by randomguy » Sat Sep 15, 2018 12:28 pm

rgs92 wrote:
Thu Sep 13, 2018 11:52 pm
In the beginning, you say:
If I put $200K in another 4 rental properties, I bet I can get at least $15K a year from the additional properties

If you buy a fixed annuity, you will get about $1,000 a month ($12K a year) which is not that far off from $15K without all the associated expenses.
And you will have 200k less of a networth and your income will not grow with inflation they way rents tend to.

randomguy
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Re: Pension alternatives

Post by randomguy » Sat Sep 15, 2018 12:32 pm

Stormbringer wrote:
Sat Sep 15, 2018 9:54 am
It's always puzzled me that people generally like pensions and social security, but turn their noses up at SPIAs. In the absence of a pension, I really like the idea of using SS + annuity to create an income floor to protect against bad times.
Find me a SPIA that makes payouts based on 6-8% returns (i.e. what pensions use) and I bet a lot of people would find them appealing. Locking your money up with 3% returns like todays SPIAs offer isn't as remotely as appealing.

Stormbringer
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Re: Pension alternatives

Post by Stormbringer » Sat Sep 15, 2018 12:58 pm

randomguy wrote:
Sat Sep 15, 2018 12:32 pm
Find me a SPIA that makes payouts based on 6-8% returns (i.e. what pensions use) and I bet a lot of people would find them appealing. Locking your money up with 3% returns like todays SPIAs offer isn't as remotely as appealing.
When I check immediateannuities.com it shows the current joint life payout ratio at 5.55% for a 65-year old couple. So if someone has $200K saved, that would be about $11K a year. Using the 4% rule, they would only have $8K to spend.

The cost of course is that there would be nothing to leave to the kids.
"Compound interest is the most powerful force in the universe." - Albert Einstein

Stormbringer
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Re: Pension alternatives

Post by Stormbringer » Sat Sep 15, 2018 1:11 pm

TN_Boy wrote:
Sat Sep 15, 2018 12:12 pm
I don't see an SPIA as useful to anybody that doesn't have a fairly big investment portfolio. If you've only saved 50k or 100k, you probably don't want to take money out of those savings to get an SPIA.
I dunno.

Consider a couple of modest means who are retiring with two small social security checks and $100K in savings. Using the 4% rule, that $100K would provide them with extra $4,000 in annual income. An SPIA would give them $5,600 in income. That extra $1,600 a year could be really meaningful to that couple ... a vacation, a doctor bill, a repair to the house, etc. We're talking about people who are just scraping by, and probably not great at managing their money, so there is a risk that they burn through the $100K and are left with just SS.
"Compound interest is the most powerful force in the universe." - Albert Einstein

TN_Boy
Posts: 542
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Re: Pension alternatives

Post by TN_Boy » Sat Sep 15, 2018 1:35 pm

Stormbringer wrote:
Sat Sep 15, 2018 1:11 pm
TN_Boy wrote:
Sat Sep 15, 2018 12:12 pm
I don't see an SPIA as useful to anybody that doesn't have a fairly big investment portfolio. If you've only saved 50k or 100k, you probably don't want to take money out of those savings to get an SPIA.
I dunno.

Consider a couple of modest means who are retiring with two small social security checks and $100K in savings. Using the 4% rule, that $100K would provide them with extra $4,000 in annual income. An SPIA would give them $5,600 in income. That extra $1,600 a year could be really meaningful to that couple ... a vacation, a doctor bill, a repair to the house, etc. We're talking about people who are just scraping by, and probably not great at managing their money, so there is a risk that they burn through the $100K and are left with just SS.
I can't see any way I'd write a check for even 1/2 that 100k savings to fund an SPIA. I'd want that money to cover medical expenses, car repairs ... stuff. $1,600/year is not that much more. And dropping by the value of inflation every year. I understand the argument, but the numbers just don't make sense to me. Maybe they do for more people than I think.

grok87
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Re: Pension alternatives

Post by grok87 » Sat Sep 15, 2018 2:11 pm

Almost there wrote:
Sat Sep 15, 2018 12:05 pm
Thank you.

Almost there
my pleasure.
Keep calm and Boglehead on. KCBO.

Dottie57
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Re: Pension alternatives

Post by Dottie57 » Sat Sep 15, 2018 2:24 pm

togb wrote:
Fri Sep 14, 2018 4:12 pm
rgs92 wrote:
Thu Sep 13, 2018 11:52 pm
In the beginning, you say:
If I put $200K in another 4 rental properties, I bet I can get at least $15K a year from the additional properties

If you buy a fixed annuity, you will get about $1,000 a month ($12K a year) which is not that far off from $15K without all the associated expenses.
Seriously? I must not have shopped annuities at the right place. If I thought I could have an annuity that was returning 6%, I'd do it in a heartbeat. Where would I find such a beast?
Not an investment, but a payout based on how long they think you will live. Ins co investests money, So they make some and so do you. But it is all based on how long they think you will live. For the the same amount of money, my mom gets a better payout than I do since her lifetime will be shorter.

Remember we are only talking about Single Premium Immediate Annuities.

james22
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Re: Pension alternatives

Post by james22 » Sat Sep 15, 2018 9:49 pm

grok87 wrote:
Sat Sep 15, 2018 12:02 pm
here it is
Thanks, grok.
This whole episode is likely to end so badly that future children will learn about it in school and shake their heads in wonder at the rank stupidity of it all... Hussman

randomguy
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Re: Pension alternatives

Post by randomguy » Sat Sep 15, 2018 10:04 pm

Stormbringer wrote:
Sat Sep 15, 2018 12:58 pm
randomguy wrote:
Sat Sep 15, 2018 12:32 pm
Find me a SPIA that makes payouts based on 6-8% returns (i.e. what pensions use) and I bet a lot of people would find them appealing. Locking your money up with 3% returns like todays SPIAs offer isn't as remotely as appealing.
When I check immediateannuities.com it shows the current joint life payout ratio at 5.55% for a 65-year old couple. So if someone has $200K saved, that would be about $11K a year. Using the 4% rule, they would only have $8K to spend.

The cost of course is that there would be nothing to leave to the kids.
Sure but you could also take that same 11k/year with no inflation adjustment out of the portfolio and have a success rate well above 95% if that is the way you wanted to go. And most of the time you end up with like 400k at the end of the 30 years to give to your kids instead of 0.

randomguy
Posts: 6505
Joined: Wed Sep 17, 2014 9:00 am

Re: Pension alternatives

Post by randomguy » Sat Sep 15, 2018 10:16 pm

Stormbringer wrote:
Sat Sep 15, 2018 1:11 pm
TN_Boy wrote:
Sat Sep 15, 2018 12:12 pm
I don't see an SPIA as useful to anybody that doesn't have a fairly big investment portfolio. If you've only saved 50k or 100k, you probably don't want to take money out of those savings to get an SPIA.
I dunno.

Consider a couple of modest means who are retiring with two small social security checks and $100K in savings. Using the 4% rule, that $100K would provide them with extra $4,000 in annual income. An SPIA would give them $5,600 in income. That extra $1,600 a year could be really meaningful to that couple ... a vacation, a doctor bill, a repair to the house, etc. We're talking about people who are just scraping by, and probably not great at managing their money, so there is a risk that they burn through the $100K and are left with just SS.
And having a 100k would be really useful when they get a 5k medical bill while 1600 of income leaves them in debt. They were good enough to accumulate 100k, I think assuming they will blow it all is a bit condescending. Make the situation that the couple is 80 and one of them has started severe cognitive decline and I will buy that argument a lot more.

You need to be very risk averse to buy an annuity versus holding something like a 40/60 fund. There is a reason why people don't buy them. Most people are happy (or ignorant of:)) to take some risk in order to end up with more cash.

grok87
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Joined: Tue Feb 27, 2007 9:00 pm

Re: Pension alternatives

Post by grok87 » Sun Sep 16, 2018 7:40 am

james22 wrote:
Sat Sep 15, 2018 9:49 pm
grok87 wrote:
Sat Sep 15, 2018 12:02 pm
here it is
Thanks, grok.
my pleasure.
Keep calm and Boglehead on. KCBO.

togb
Posts: 138
Joined: Mon Oct 23, 2017 8:36 pm

Re: Pension alternatives

Post by togb » Thu Sep 20, 2018 9:34 pm

Great inputs and so much food for thought. After chewing on these ideas a bit, I realize that part of getting older does involve slowing down a little. And maybe I should not take on more rentals, particular since I still work full time.

I'm going to play with some ideas on how to set a portion of my retirement funds to generate this income. I already own some of the building blocks, it's worth playing with the numbers to see my bond investments are generating as a group.

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