Why take the risk with equities?

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Time2Quit
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Why take the risk with equities?

Post by Time2Quit »

There have been many threads discussing SWR including 3% is the new 4%, and Bengen was quoted as saying 4% rule should really 4.5%. Conventional wisdom seems to state that retirements lasting more than 30 years, need a lower than 4% SWR (this can be debated forever). I also read threads taking about SPIA's and immediateannuities.com which piqued my interest, so I visited the site and plugged in my age (mid 40's) and assumed a $1M buy in for simplicity. At my age the payout is 5.03%. I increased the age to 55 and the payout percentage increased to 5.56%.

This got me thinking that if we cannot get more that 4% SWR then a SPIA might be a much better deal. A SPIA also has the advantage of getting a larger piece of the pie up front and spending while you are in your go-go years. I understand that a SPIA is not COLA adjusted so you would be losing purchasing power. This led me to compare the SWR increased by inflation every year vs the SPIA.

I took a $1M investment and run it through 6 SWR scenarios (assuming you do not deviate and continue to take the inflation adjusted withdrawals) vs. an SPIA annuity paying 5.03% and 5.53% respectively. I wanted to see how much income a retiree will get to spend in their lifetime.

Scenario 1: 3% SWR with 3% Inflation for 30 years
Scenario 2: 3% SWR with 2% inflation for 30 years
Scenario 3: 4% SWR with 3% inflation for 30 years
Scenario 4: 4% SWR with 2% inflation for 30 years
Scenario 5: 3% SWR with 3% inflation for 40 years
Scenario 6: 3% SWR with 2% inflation for 40 years

Total amount retiree receives:

Scenario 1: $1,427,262
Scenario 2: $1,217,042
Scenario 3: $1,903,017
Scenario 4: $1,622,723
Scenario 5: $2,262,038
Scenario 6: $1,812,059

SPIA 30 year 5.03%: $1,587,300
SPIA 40 year 5.03% $2,012,000
SPIA 30 year 5.53% $1,659,000
SPIA 40 year 5.53% $2,212,000

After looking at these numbers, if "3% is the new 4%" then why take the risk with equities or bonds? A 4% SWR also has the chance of being zero (small chance) after 30 years according to studies. Is there enough risk premium in equities or bonds to justify them when you have an alternative like the SPIA?

Should SPIA's take up a good portion of ones portfolio?

I know using a constant inflation number will not capture high inflationary periods which would significantly erode the SPIA's purchasing number. I also understand that you could have insurer defaults which would jeopardize your payout, but that could be mitigated by purchasing several policies.

Studies also shoe that you may have a larger portfolio in the end using a 4% SWR but you will not be able to spend it since it is the end and that a VPW is an alternative to guarantee that you spend your entire portfolio. However, I want to focus specifically on the 4% SWR that you see touted and discussed all over and the advice given to early retirees that they can only take a sub 4% SWR so as not to run out.

Will a person who bought a 5%-5.5% SPIA in 2000 be better off today compared to the 4% SWR person with a 60/40? At what payout rate is a SPIA definitely superior?

Looking forward to thoughts and insights.
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HomerJ
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Re: Why take the risk with equities?

Post by HomerJ »

If one believes that "3% is the new 4%", then absolutely people should be looking at SPIAs to be part of their retirement plan.

One can get a lifetime 5.1% SPIA today as a 50 year old man.

And 6.0% as a 60 year old man.

Those are not inflation adjusted, so that throws some more calculations into it, but yes, it would make sense to definitely at least look at creating a guaranteed income stream with a smaller pool of money if one is convinced that going forward, returns will be so low that 3% is the most one can pull.
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willthrill81
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Re: Why take the risk with equities?

Post by willthrill81 »

IMHO, the primary reason for buying a SPIA is as longevity insurance, not as a method to maximize your income. Historically, a SPIA locks you in to the bottom ~15% of market returns, forces you to relinquish all control of the amortized assets, and usually leaves none of the amortized assets behind for those who survive you in return for a guaranteed (subject to the claims paying ability of the insurance company and your state's guaranty association) nominal income. The cons are big and irrevocable, and that's why they're relatively unpopular.

There's no flipping way I would recommend a SPIA without a COLA for someone with a 30+ year retirement in front of them. From 1970-1979, the value of a dollar was more than halved. That would basically take your 5.03% initial 'withdrawal rate' down to around 2.5% in a decade. And historically, the likelihood of inflation really hurting you has been much higher than the likelihood of a 4% SWR approach failing in 30 years or 3.5% failing in 40 years.
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market timer
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Re: Why take the risk with equities?

Post by market timer »

I'm a big fan of annuities. I'd go so far as to say a typical retiree with under $500K in assets should have essentially everything outside an emergency fund invested in annuities. The reason being annuities provide the highest SWR, especially if they are inflation adjusted.

As wealth and desire to bequeath assets increase, one might start to view the portfolio with an eye toward future generations. In this case, the longevity insurance is less critical, and one can take more equity risk.
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willthrill81
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Re: Why take the risk with equities?

Post by willthrill81 »

market timer wrote: Tue Mar 26, 2019 9:26 amThe reason being annuities provide the highest SWR, especially if they are inflation adjusted.
Would you explain how you have come to that conclusion?

In the overwhelming majority of historic 30 year periods, for instance, the average 'SWR' was 5-6%. Compare that to a CPI-linked SPIA where the current payout for a 65 year old will be around 4%, maybe even less (I can't find a quote for a CPI-linked SPIA right now). So it was only the worst historic periods in terms of sequences of returns where the two would be roughly equivalent, and the rest of the time, you would have been worse off with the SPIA. Granted, the SPIA is 'guaranteed' for life, but it comes with the big drawback of forcing you to permanently relinquish control of the amortized assets.
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gmaynardkrebs
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Re: Why take the risk with equities?

Post by gmaynardkrebs »

I agree totally -- no SPIA not without a COLA.
A TIPS ladder might be something to consider with part of your next egg, in addition to an annuity.
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Re: Why take the risk with equities?

Post by ResearchMed »

HomerJ wrote: Tue Mar 26, 2019 9:06 am If one believes that "3% is the new 4%", then absolutely people should be looking at SPIAs to be part of their retirement plan.

One can get a lifetime 5.1% SPIA today as a 50 year old man.

And 6.0% as a 60 year old man.

Those are not inflation adjusted, so that throws some more calculations into it, but yes, it would make sense to definitely at least look at creating a guaranteed income stream with a smaller pool of money if one is convinced that going forward, returns will be so low that 3% is the most one can pull.
You shouldn't compare the 3% or 4% return from SWR/etc., with the *payout* rate on SPIAs, as the latter also includes return of your own money.

RM
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willthrill81
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Re: Why take the risk with equities?

Post by willthrill81 »

ResearchMed wrote: Tue Mar 26, 2019 9:40 am
HomerJ wrote: Tue Mar 26, 2019 9:06 am If one believes that "3% is the new 4%", then absolutely people should be looking at SPIAs to be part of their retirement plan.

One can get a lifetime 5.1% SPIA today as a 50 year old man.

And 6.0% as a 60 year old man.

Those are not inflation adjusted, so that throws some more calculations into it, but yes, it would make sense to definitely at least look at creating a guaranteed income stream with a smaller pool of money if one is convinced that going forward, returns will be so low that 3% is the most one can pull.
You shouldn't compare the 3% or 4% return from SWR/etc., with the *payout* rate on SPIAs, as the latter also includes return of your own money.

RM
That's true, but in all fairness, a SWR approach is 'willing' to exhaust all of the portfolio, and this would have happened, more or less, at the end of about three historic 30 year periods in the U.S. if you were using the '4% rule of thumb'. But we can't ignore that in all of the other periods, you would still have some money left over after 30 years, usually more than you started with in nominal dollars at least and sometimes a lot more.

A SPIA basically locks you in to the worst historic periods for a balanced portfolio but 'guarantees' income for life. If you retain the assets instead in a balanced portfolio, you give up the 'guaranteed' income for life in return for retaining control of the assets and allowing for significant upside potential.
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Re: Why take the risk with equities?

Post by GrowthSeeker »

In the OP the huge difference between Scenarios 1-6 vs the different SPIA plans is the effect on Net Worth.

With the SPIA, your original $1,000,000 is gone.
With the withdrawal rate Scenarios, you still have whatever the Million Dollars has grown to or shrunk to.

Or did I miss something?
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Re: Why take the risk with equities?

Post by dodecahedron »

willthrill81 wrote: Tue Mar 26, 2019 9:33 am
market timer wrote: Tue Mar 26, 2019 9:26 amThe reason being annuities provide the highest SWR, especially if they are inflation adjusted.
Would you explain how you have come to that conclusion?

In the overwhelming majority of historic 30 year periods, for instance, the average 'SWR' was 5-6%.
The ¨average SWR¨ is not a useful guideline for choosing the SWR that will work for *you*. As Mike Zwecher memorably pointed out, each retiree only gets ¨one whack at the cat.¨
Compare that to a CPI-linked SPIA where the current payout for a 65 year old will be around 4%, maybe even less (I can't find a quote for a CPI-linked SPIA right now). So it was only the worst historic periods in terms of sequences of returns where the two would be roughly equivalent, and the rest of the time, you would have been worse off with the SPIA.
You do not know until in retrospect (after you are dead) whether your retirement coincided with one of the worst periods in history or not, so the fact that 5-6% SWR would have worked on average does not make it safe for you to draw down at that rate. Sequence of returns risk is entirely unpredictable. So even if 5-6% SWR would have worked in retrospect for a given retiree, if she planned prudently, she did not actually get to realize the pleasures of spending at that rate during her lifetime.

Annuities not only pool longevity risk, they also pool sequence of returns risk.
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Re: Why take the risk with equities?

Post by gmaynardkrebs »

I would also recommend spreading the annuities over more than one insurerer.
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Re: Why take the risk with equities?

Post by HomerJ »

Look guys, I agree with you that a SPIA is a terrible investment.

The payout is not a return.

Any money put into a SPIA is GONE. There is nothing for heirs.

But if you want to safely spend more money in retirement, a SPIA is useful.

If someone is so petrified of running out of money that they only feel safe using a 3% withdrawal rate, then a SPIA might be a useful tool to increase spending in retirement.

To address will's point, they are already locking themselves into worse than the worst historical period.

I didn't say SPIAs are a general great tool, but the more one drops their SWR, the more attractive a SPIA becomes.

A 60-year old with $1 million might only feel comfortable pulling $30,000 a year.

With a 6% SPIA, they could annuitize $250,000, get $15,000 a year, and then pull 3% from the other $750,000, for another $22,500.

That gives them $37,500 a year or 25% more spending a year.
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Re: Why take the risk with equities?

Post by BL »

I wouldn't lock in my money until at least age 70, unless there are exceptional reasons for it.

I believe the best way to get an inflation-increased annuity would be to delay SS up to age 70. I suppose you could even consider the money needed for each month's delay of SS as a mini SPIA-with-COLA purchase.
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Re: Why take the risk with equities?

Post by willthrill81 »

dodecahedron wrote: Tue Mar 26, 2019 10:01 am
willthrill81 wrote: Tue Mar 26, 2019 9:33 am
market timer wrote: Tue Mar 26, 2019 9:26 amThe reason being annuities provide the highest SWR, especially if they are inflation adjusted.
Would you explain how you have come to that conclusion?

In the overwhelming majority of historic 30 year periods, for instance, the average 'SWR' was 5-6%.
The ¨average SWR¨ is not a useful guideline for choosing the SWR that will work for *you*. As Mike Zwecher memorably pointed out, each retiree only gets ¨one whack at the cat.¨
Compare that to a CPI-linked SPIA where the current payout for a 65 year old will be around 4%, maybe even less (I can't find a quote for a CPI-linked SPIA right now). So it was only the worst historic periods in terms of sequences of returns where the two would be roughly equivalent, and the rest of the time, you would have been worse off with the SPIA.
You do not know until in retrospect (after you are dead) whether your retirement coincided with one of the worst periods in history or not, so the fact that 5-6% SWR would have worked on average does not make it safe for you to draw down at that rate. Sequence of returns risk is entirely unpredictable. So even if 5-6% SWR would have worked in retrospect for a given retiree, if she planned prudently, she did not actually get to realize the pleasures of spending at that rate during her lifetime.

Annuities not only pool longevity risk, they also pool sequence of returns risk.
I agree that the 'average SWR' is not very useful, but I did so to address Market Timer's contention that a SPIA provides "the highest SWR." At the very best, they may provide a SWR equal to the worst historic U.S. periods, but in the overwhelming majority of instances, they are inferior, usually decidedly so.
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Re: Why take the risk with equities?

Post by willthrill81 »

HomerJ wrote: Tue Mar 26, 2019 10:09 amI didn't say SPIAs are a general great tool, but the more one drops their SWR, the more attractive a SPIA becomes.

A 60-year old with $1 million might only feel comfortable pulling $30,000 a year.

With a 6% SPIA, they could annuitize $250,000, get $15,000 a year, and then pull 3% from the other $750,000, for another $22,500.

That gives them $37,500 a year or 25% more spending a year.
I agree that those who simply cannot bring themselves to spend more than 3% may be well-served with a SPIA. However, I wonder how many of those who are unwilling to spend more than 3% will be willing instead to fork over 25% of their portfolio (per your illustration) in one fail swoop to an insurance company in return for a promise to pay. Will they trust the insurance company more than the markets, both stock and bond, in addition to permanently losing control of the premium? Some clearly would, but I suspect that they would be in the decided minority.
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Re: Why take the risk with equities?

Post by DrGoogle2017 »

I’m still mulling about annuities for a small portion of my husband’s account. Maybe deferred annuities for longevity insurance, also for avoid paying taxes on RMDs, and avoiding senior fraudulent scams when we’re old and stupid, plus simplifying money management for my kids when we’re old.
I put in $50K at age 70 and get $1500 a month at age 80 for male seems too good to be true.
But I’m been reading high fees, no COLA growth, etc.. so I’m still on the fence, or we still have time to think about this. I know I can do the same thing with CDs but who wants to deal with this when I’m in my 80s.
Last edited by DrGoogle2017 on Tue Mar 26, 2019 10:20 am, edited 1 time in total.
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Re: Why take the risk with equities?

Post by Admiral »

The problem is your comparison: a 3 or 4% SWR is not some law that retirees blindly follow. It's a theoretical draw. Retirees have the ability to alter their strategy based on market returns. Conversely, the annuity payout is fixed. Also, most people want to leave a legacy, not die with zero.

Personally I would never be comfortable working 30-40 years while saving and managing my own money and then handing it over to an annuity company and hoping for the best. For savers with relatively low portfolios whose SS and portfolio draw are on the edge of actually covering their expected expenses, an annuity can be useful. For everyone else (which is likely most Bhs) they are probably not.

There's also the small problem of not knowing when you are going to die...
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Re: Why take the risk with equities?

Post by willthrill81 »

DrGoogle2017 wrote: Tue Mar 26, 2019 10:19 am I’m still mulling about annuities for a small portion of my husband’s account. Maybe deferred annuities for longevity insurance, also for avoid paying taxes on RMDs, and avoiding senior fraudulent scams when we’re old and stupid, plus simplifying money management for my kids when we’re old.
I put in $50K at age 70 and get $1500 a month at age 80 for male seems too good to be true.
But I’m been reading high fees, no COLA growth, etc.. so I’m still on the fence, or we still have time to think about this. I know I can do the same thing with CDs but who wants to deal with this when I’m in my 80s.
I don't believe that any insurance company sells a deferred annuity with a COLA. If you're interested in that sort of thing, a better strategy would be to invest the funds you would annuitize in TIPS that will mature close to the time you would buy the SPIA, then use those funds to buy the SPIA when you reach your desired age (e.g. 80).
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Re: Why take the risk with equities?

Post by onourway »

GrowthSeeker wrote: Tue Mar 26, 2019 9:53 am In the OP the huge difference between Scenarios 1-6 vs the different SPIA plans is the effect on Net Worth.

With the SPIA, your original $1,000,000 is gone.
With the withdrawal rate Scenarios, you still have whatever the Million Dollars has grown to or shrunk to.

Or did I miss something?
Exactly this! When running simulations of historical withdrawal rates a large proportion of the outcomes of 3-4% withdrawal leaves you with more money than you started with. If that becomes apparent it's happening to you after 10-20 years of retirement you have the option to start spending (or giving) a lot more!
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Re: Why take the risk with equities?

Post by gmaynardkrebs »

How does qualifying for Medicaid and Medicaid-paid LTC play into this?
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Re: Why take the risk with equities?

Post by delamer »

I didn’t understand this —

“A SPIA also has the advantage of getting a larger piece of the pie up front and spending while you are in your go-go years.”

As others have mentioned, annuities leave nothing for heirs.

Also, if you end up with high end-of-life expenses — or a significant illness or other major financial event in your 70’s, for example — you have lost your ability to access lump sums of cash.

And if you are part of a couple, then you need to purchase annuities with that in mind. Not impossible, but more complicated.

If you can’t cover you basic expenses with Social Security and pensions, then it certainly could make sense to annuitized enough assets to do so. But just to increase your withdrawal rate? No.
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Re: Why take the risk with equities?

Post by market timer »

willthrill81 wrote: Tue Mar 26, 2019 9:33 am
market timer wrote: Tue Mar 26, 2019 9:26 amThe reason being annuities provide the highest SWR, especially if they are inflation adjusted.
Would you explain how you have come to that conclusion?

In the overwhelming majority of historic 30 year periods, for instance, the average 'SWR' was 5-6%. Compare that to a CPI-linked SPIA where the current payout for a 65 year old will be around 4%, maybe even less (I can't find a quote for a CPI-linked SPIA right now). So it was only the worst historic periods in terms of sequences of returns where the two would be roughly equivalent, and the rest of the time, you would have been worse off with the SPIA. Granted, the SPIA is 'guaranteed' for life, but it comes with the big drawback of forcing you to permanently relinquish control of the amortized assets.
This is really a question of fault tolerance. If you depend on receiving a certain amount of income each month, an annuity will provide this income stream with near-certainty cheaper than any other investment available. This is an easy "no-arbitrage" proof. If you are willing to tolerate some risk that your income falls short of expectations, in order to have higher expected returns, you can do this with stocks. That's why I prefaced my comment with the following:
I'd go so far as to say a typical retiree with under $500K in assets should have essentially everything outside an emergency fund invested in annuities.
A 65-year-old couple with less than $500K in assets does not have that much room to cut back on spending if they start with a 4% withdrawal rate and investment returns are unfavorable. They basically need all they have just to cover food, shelter, health care, and other essentials. It's a different story above $2M.

The only way to avoid the conclusion that annuities provide the highest SWR is to have a fault tolerance around SWR, such as "Household will go broke with no greater than 5% chance." Personally, I'm not a fan of withdrawal strategies that are static and allow the possibility of running out of money. It doesn't make sense that someone who retires at a market peak like October 2007 should withdraw at double the rate of someone who retires at a trough like March 2009 throughout retirement. Therefore, I'd prefer to build the fault tolerance around a dynamic withdrawal strategy, such as "Household will not be forced to cut spend by more than 5% from initial spend rate to remain on sustainable path." This is more reflective of how I expect most would behave when confronted with poor returns. As this tolerance increases from 5% to 50% or more, the household could allocate a larger fraction to riskier assets. Somewhat offsetting this is the loss of mortality credits vs. annuities, so such flexibility is relevant mostly for early retirees.
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Re: Why take the risk with equities?

Post by Admiral »

market timer wrote: Tue Mar 26, 2019 10:28 am
willthrill81 wrote: Tue Mar 26, 2019 9:33 am
market timer wrote: Tue Mar 26, 2019 9:26 amThe reason being annuities provide the highest SWR, especially if they are inflation adjusted.
Would you explain how you have come to that conclusion?

In the overwhelming majority of historic 30 year periods, for instance, the average 'SWR' was 5-6%. Compare that to a CPI-linked SPIA where the current payout for a 65 year old will be around 4%, maybe even less (I can't find a quote for a CPI-linked SPIA right now). So it was only the worst historic periods in terms of sequences of returns where the two would be roughly equivalent, and the rest of the time, you would have been worse off with the SPIA. Granted, the SPIA is 'guaranteed' for life, but it comes with the big drawback of forcing you to permanently relinquish control of the amortized assets.
This is really a question of fault tolerance. If you depend on receiving a certain amount of income each month, an annuity will provide this income stream with near-certainty cheaper than any other investment available. This is an easy "no-arbitrage" proof. If you are willing to tolerate some risk that your income falls short of expectations, in order to have higher expected returns, you can do this with stocks. That's why I prefaced my comment with the following:
I'd go so far as to say a typical retiree with under $500K in assets should have essentially everything outside an emergency fund invested in annuities.
A 65-year-old couple with less than $500K in assets does not have that much room to cut back on spending if they start with a 4% withdrawal rate and investment returns are unfavorable. They basically need all they have just to cover food, shelter, health care, and other essentials. It's a different story above $2M.

The only way to avoid the conclusion that annuities provide the highest SWR is to have a fault tolerance around SWR, such as "Household will go broke with no greater than 5% chance." Personally, I'm not a fan of withdrawal strategies that are static and allow the possibility of running out of money. It doesn't make sense that someone who retires at a market peak like October 2007 should withdraw at double the rate of someone who retires at a trough like March 2009 throughout retirement. Therefore, I'd prefer to build the fault tolerance around a dynamic withdrawal strategy, such as "Household will not be forced to cut spend by more than 5% from initial spend rate to remain on sustainable path." This is more reflective of how I expect most would behave when confronted with poor returns. As this tolerance increases from 5% to 50% or more, the household could allocate a larger fraction to riskier assets. Somewhat offsetting this is the loss of mortality credits vs. annuities, so such flexibility is relevant mostly for early retirees.
And if the annuitant dies relatively young? What happens to the surviving spouse? What are they living on if the money is gone?

I agree that VPW is what most retirees do (even if they don't call it that). When a dual-earning couple has a job loss, they cut back on expenses (as much as they can). Same thing with retirees who face poor market returns. Again, if we're speaking of your proverbial couple where SS and the returns on their 500k barely meet there needs, they may want to annuitize some. But all?
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Re: Why take the risk with equities?

Post by market timer »

Admiral wrote: Tue Mar 26, 2019 10:34 amAnd if the annuitant dies relatively young? What happens to the surviving spouse? What are they living on if the money is gone?
Given that expenses increase with number of people in the household, I believe it would be most efficient for the household to buy three policies:
1. Joint with survivor benefit: To cover fixed expenses that don't depend on number of people in the household (e.g., property taxes).
2. Individual with no survivor benefits for him: To cover expenses tied to his consumption (e.g., food, health care).
3. Individual with no survivor benefits for her: To cover expenses tied to her consumption.
Admiral wrote: Tue Mar 26, 2019 10:34 amI agree that VPW is what most retirees do (even if they don't call it that). When a dual-earning couple has a job loss, they cut back on expenses (as much as they can). Same thing with retirees who face poor market returns. Again, if we're speaking of your proverbial couple where SS and the returns on their 500k barely meet there needs, they may want to annuitize some. But all?
Yes, I'd suggest annuitizing it all except the emergency fund. The vast majority of retirees should not be in the stock market.
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Re: Why take the risk with equities?

Post by Time2Quit »

GrowthSeeker wrote: Tue Mar 26, 2019 9:53 am In the OP the huge difference between Scenarios 1-6 vs the different SPIA plans is the effect on Net Worth.

With the SPIA, your original $1,000,000 is gone.
With the withdrawal rate Scenarios, you still have whatever the Million Dollars has grown to or shrunk to.

Or did I miss something?
You are correct stating net worth is gone with SPIA, but in the 1966 and 2000 scenarios those cohorts would have close to zero balance remaining as well.
"It is not the man who has too little, but the man who craves more, that is poor." --Seneca
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Re: Why take the risk with equities?

Post by gmaynardkrebs »

market timer wrote: Tue Mar 26, 2019 10:41 am The vast majority of retirees should not be in the stock market.
Just to clarify, most retirees have barely two nickels to invest in anything. I think your point is that the vast majority of retirees, including those who have significant retirement assets, should still not be in the stock market.[/u]. I happen to agree with you, but it's a minority view here.
Last edited by gmaynardkrebs on Tue Mar 26, 2019 11:36 am, edited 1 time in total.
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Re: Why take the risk with equities?

Post by willthrill81 »

market timer wrote: Tue Mar 26, 2019 10:28 am
willthrill81 wrote: Tue Mar 26, 2019 9:33 am
market timer wrote: Tue Mar 26, 2019 9:26 amThe reason being annuities provide the highest SWR, especially if they are inflation adjusted.
Would you explain how you have come to that conclusion?

In the overwhelming majority of historic 30 year periods, for instance, the average 'SWR' was 5-6%. Compare that to a CPI-linked SPIA where the current payout for a 65 year old will be around 4%, maybe even less (I can't find a quote for a CPI-linked SPIA right now). So it was only the worst historic periods in terms of sequences of returns where the two would be roughly equivalent, and the rest of the time, you would have been worse off with the SPIA. Granted, the SPIA is 'guaranteed' for life, but it comes with the big drawback of forcing you to permanently relinquish control of the amortized assets.
This is really a question of fault tolerance. If you depend on receiving a certain amount of income each month, an annuity will provide this income stream with near-certainty cheaper than any other investment available. This is an easy "no-arbitrage" proof. If you are willing to tolerate some risk that your income falls short of expectations, in order to have higher expected returns, you can do this with stocks. That's why I prefaced my comment with the following:
I'd go so far as to say a typical retiree with under $500K in assets should have essentially everything outside an emergency fund invested in annuities.
A 65-year-old couple with less than $500K in assets does not have that much room to cut back on spending if they start with a 4% withdrawal rate and investment returns are unfavorable. They basically need all they have just to cover food, shelter, health care, and other essentials. It's a different story above $2M.

The only way to avoid the conclusion that annuities provide the highest SWR is to have a fault tolerance around SWR, such as "Household will go broke with no greater than 5% chance." Personally, I'm not a fan of withdrawal strategies that are static and allow the possibility of running out of money. It doesn't make sense that someone who retires at a market peak like October 2007 should withdraw at double the rate of someone who retires at a trough like March 2009 throughout retirement. Therefore, I'd prefer to build the fault tolerance around a dynamic withdrawal strategy, such as "Household will not be forced to cut spend by more than 5% from initial spend rate to remain on sustainable path." This is more reflective of how I expect most would behave when confronted with poor returns. As this tolerance increases from 5% to 50% or more, the household could allocate a larger fraction to riskier assets. Somewhat offsetting this is the loss of mortality credits vs. annuities, so such flexibility is relevant mostly for early retirees.
Okay, if you're talking about using only 'guaranteed' income sources, then yes, I'd agree that SPIAs provide the highest SWR. That being said, in the context of SWRs, 99% of people are referring to a balanced portfolio of stocks and bonds.

Regarding the couples with under $500k in assets, it depends greatly on other income streams they have. A pension or SS may cover most or all of their essential spending needs, allowing their portfolio to be primarily or exclusively for discretionary spending. As such, they can be as conservative or as aggressive as they wish. I have three family members in just such a position.
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Re: Why take the risk with equities?

Post by willthrill81 »

Time2Quit wrote: Tue Mar 26, 2019 10:59 am
GrowthSeeker wrote: Tue Mar 26, 2019 9:53 am In the OP the huge difference between Scenarios 1-6 vs the different SPIA plans is the effect on Net Worth.

With the SPIA, your original $1,000,000 is gone.
With the withdrawal rate Scenarios, you still have whatever the Million Dollars has grown to or shrunk to.

Or did I miss something?
You are correct stating net worth is gone with SPIA, but in the 1966 and 2000 scenarios those cohorts would have close to zero balance remaining as well.
False. Year 2000 retirees who followed the '4% rule' to the letter with a 60/40 portfolio would have had about 60% of their inflation-adjusted starting balance still intact as of January, 2019.
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Re: Why take the risk with equities?

Post by Time2Quit »

willthrill81 wrote: Tue Mar 26, 2019 11:11 am
Time2Quit wrote: Tue Mar 26, 2019 10:59 am
GrowthSeeker wrote: Tue Mar 26, 2019 9:53 am In the OP the huge difference between Scenarios 1-6 vs the different SPIA plans is the effect on Net Worth.

With the SPIA, your original $1,000,000 is gone.
With the withdrawal rate Scenarios, you still have whatever the Million Dollars has grown to or shrunk to.

Or did I miss something?
You are correct stating net worth is gone with SPIA, but in the 1966 and 2000 scenarios those cohorts would have close to zero balance remaining as well.
False. Year 2000 retirees who followed the '4% rule' to the letter with a 60/40 portfolio would have had about 60% of their inflation-adjusted starting balance still intact as of January, 2019.
Let me correct the state meant, year 2000 will have a good chance of exhausting their portfolios as well.

Point being, with a 4% SWR there is a chance of ending up with zero as well.
"It is not the man who has too little, but the man who craves more, that is poor." --Seneca
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Re: Why take the risk with equities?

Post by willthrill81 »

Time2Quit wrote: Tue Mar 26, 2019 11:23 am
willthrill81 wrote: Tue Mar 26, 2019 11:11 am
Time2Quit wrote: Tue Mar 26, 2019 10:59 am
GrowthSeeker wrote: Tue Mar 26, 2019 9:53 am In the OP the huge difference between Scenarios 1-6 vs the different SPIA plans is the effect on Net Worth.

With the SPIA, your original $1,000,000 is gone.
With the withdrawal rate Scenarios, you still have whatever the Million Dollars has grown to or shrunk to.

Or did I miss something?
You are correct stating net worth is gone with SPIA, but in the 1966 and 2000 scenarios those cohorts would have close to zero balance remaining as well.
False. Year 2000 retirees who followed the '4% rule' to the letter with a 60/40 portfolio would have had about 60% of their inflation-adjusted starting balance still intact as of January, 2019.
Let me correct the state meant, year 2000 will have a good chance of exhausting their portfolios as well.

Point being, with a 4% SWR there is a chance of ending up with zero as well.
There is also a chance that the insurance company selling a SPIA will go bankrupt and that your state's guaranty association will not honor the policy either. Or that inflation dramatically reduces the purchasing power of a nominal SPIA. Or that your own inflation rate is significantly higher than the CPI that your SPIA is linked to. And so on.

All roads carry risk.
Last edited by willthrill81 on Tue Mar 26, 2019 11:28 am, edited 1 time in total.
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Re: Why take the risk with equities?

Post by Time2Quit »

onourway wrote: Tue Mar 26, 2019 10:25 am
GrowthSeeker wrote: Tue Mar 26, 2019 9:53 am In the OP the huge difference between Scenarios 1-6 vs the different SPIA plans is the effect on Net Worth.

With the SPIA, your original $1,000,000 is gone.
With the withdrawal rate Scenarios, you still have whatever the Million Dollars has grown to or shrunk to.

Or did I miss something?
Exactly this! When running simulations of historical withdrawal rates a large proportion of the outcomes of 3-4% withdrawal leaves you with more money than you started with. If that becomes apparent it's happening to you after 10-20 years of retirement you have the option to start spending (or giving) a lot more!

Yes but what I am trying to convey is, if you are unlucky and the 4% scenario begins to fail, you will cut back your withdrawal percentage which would then leave you with less money to spend, while the SPIA is a steady income stream.
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Re: Why take the risk with equities?

Post by Time2Quit »

HomerJ wrote: Tue Mar 26, 2019 10:09 am Look guys, I agree with you that a SPIA is a terrible investment.

The payout is not a return.

Any money put into a SPIA is GONE. There is nothing for heirs.

But if you want to safely spend more money in retirement, a SPIA is useful.

If someone is so petrified of running out of money that they only feel safe using a 3% withdrawal rate, then a SPIA might be a useful tool to increase spending in retirement.

To address will's point, they are already locking themselves into worse than the worst historical period.

I didn't say SPIAs are a general great tool, but the more one drops their SWR, the more attractive a SPIA becomes.

A 60-year old with $1 million might only feel comfortable pulling $30,000 a year.

With a 6% SPIA, they could annuitize $250,000, get $15,000 a year, and then pull 3% from the other $750,000, for another $22,500.

That gives them $37,500 a year or 25% more spending a year.
Homer,

This is exactly what I was getting at, Agree 100%
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Re: Why take the risk with equities?

Post by Admiral »

Time2Quit wrote: Tue Mar 26, 2019 11:28 am
onourway wrote: Tue Mar 26, 2019 10:25 am
GrowthSeeker wrote: Tue Mar 26, 2019 9:53 am In the OP the huge difference between Scenarios 1-6 vs the different SPIA plans is the effect on Net Worth.

With the SPIA, your original $1,000,000 is gone.
With the withdrawal rate Scenarios, you still have whatever the Million Dollars has grown to or shrunk to.

Or did I miss something?
Exactly this! When running simulations of historical withdrawal rates a large proportion of the outcomes of 3-4% withdrawal leaves you with more money than you started with. If that becomes apparent it's happening to you after 10-20 years of retirement you have the option to start spending (or giving) a lot more!

Yes but what I am trying to convey is, if you are unlucky and the 4% scenario begins to fail, you will cut back your withdrawal percentage which would then leave you with less money to spend, while the SPIA is a steady income stream.
Bonds and CDs are also steady income streams, with the key advantage that you don't lose all your money when you die.
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Re: Why take the risk with equities?

Post by willthrill81 »

Admiral wrote: Tue Mar 26, 2019 11:31 am
Time2Quit wrote: Tue Mar 26, 2019 11:28 am
onourway wrote: Tue Mar 26, 2019 10:25 am
GrowthSeeker wrote: Tue Mar 26, 2019 9:53 am In the OP the huge difference between Scenarios 1-6 vs the different SPIA plans is the effect on Net Worth.

With the SPIA, your original $1,000,000 is gone.
With the withdrawal rate Scenarios, you still have whatever the Million Dollars has grown to or shrunk to.

Or did I miss something?
Exactly this! When running simulations of historical withdrawal rates a large proportion of the outcomes of 3-4% withdrawal leaves you with more money than you started with. If that becomes apparent it's happening to you after 10-20 years of retirement you have the option to start spending (or giving) a lot more!

Yes but what I am trying to convey is, if you are unlucky and the 4% scenario begins to fail, you will cut back your withdrawal percentage which would then leave you with less money to spend, while the SPIA is a steady income stream.
Bonds and CDs are also steady income streams, with the key advantage that you don't lose all your money when you die.
It's not just your heirs who should be concerned about that fact. If you encounter a sudden need for significant capital, as you might with long-term care, you cannot use any of your annuitized funds to cover it. This is partly why Vanguard annuity specialists have recommended that retirees not place more than 25% of their assets in a SPIA.
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Re: Why take the risk with equities?

Post by vineviz »

Time2Quit wrote: Tue Mar 26, 2019 10:59 am
GrowthSeeker wrote: Tue Mar 26, 2019 9:53 am In the OP the huge difference between Scenarios 1-6 vs the different SPIA plans is the effect on Net Worth.

With the SPIA, your original $1,000,000 is gone.
With the withdrawal rate Scenarios, you still have whatever the Million Dollars has grown to or shrunk to.

Or did I miss something?
You are correct stating net worth is gone with SPIA, but in the 1966 and 2000 scenarios those cohorts would have close to zero balance remaining as well.
Also some retirees are likely to consider dying with $0.00 net worth is a feature, not a bug.
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Re: Why take the risk with equities?

Post by gmaynardkrebs »

vineviz wrote: Tue Mar 26, 2019 11:38 am
Time2Quit wrote: Tue Mar 26, 2019 10:59 am
GrowthSeeker wrote: Tue Mar 26, 2019 9:53 am In the OP the huge difference between Scenarios 1-6 vs the different SPIA plans is the effect on Net Worth.

With the SPIA, your original $1,000,000 is gone.
With the withdrawal rate Scenarios, you still have whatever the Million Dollars has grown to or shrunk to.

Or did I miss something?
You are correct stating net worth is gone with SPIA, but in the 1966 and 2000 scenarios those cohorts would have close to zero balance remaining as well.
Also some retirees are likely to consider dying with $0.00 net worth is a feature, not a bug.
As long as they know their DOD in advance, it's a great feature.
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Re: Why take the risk with equities?

Post by Ben Mathew »

I think SPIAs become more compelling when you are looking to exhaust the portfolio by end of life. A risky portfolio may not provide much more by way of SWR, but will likely leave a much larger estate. The precautionary savings required to fund a retirement via a risky portfolio is wasted if you don't have a bequest motive. But it's not wasted if you do.
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Re: Why take the risk with equities?

Post by acegolfer »

To answer OP, ppl take risk with equities because they are more risk tolerant.

I suppose who prefer SPIA are more risk averse and this is perhaps priced in the product. For example, if I were very risk averse, in a great health shape with long life expectancy and no heir, then I may prefer SPIA. But I'm not.
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Re: Why take the risk with equities?

Post by willthrill81 »

gmaynardkrebs wrote: Tue Mar 26, 2019 11:44 am
vineviz wrote: Tue Mar 26, 2019 11:38 am
Time2Quit wrote: Tue Mar 26, 2019 10:59 am
GrowthSeeker wrote: Tue Mar 26, 2019 9:53 am In the OP the huge difference between Scenarios 1-6 vs the different SPIA plans is the effect on Net Worth.

With the SPIA, your original $1,000,000 is gone.
With the withdrawal rate Scenarios, you still have whatever the Million Dollars has grown to or shrunk to.

Or did I miss something?
You are correct stating net worth is gone with SPIA, but in the 1966 and 2000 scenarios those cohorts would have close to zero balance remaining as well.
Also some retirees are likely to consider dying with $0.00 net worth is a feature, not a bug.
As long as they know their DOD in advance, it's a great feature.
Well, you have to pick your poison. If you want to use a 3% or lower WR, you're likely to leave behind more than you started with, meaning that you could have spent significantly more than you did. Is that a feature or a bug? It's all in the eye of the beholder.
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Re: Why take the risk with equities?

Post by Time2Quit »

willthrill81 wrote: Tue Mar 26, 2019 11:54 am
gmaynardkrebs wrote: Tue Mar 26, 2019 11:44 am
vineviz wrote: Tue Mar 26, 2019 11:38 am
Time2Quit wrote: Tue Mar 26, 2019 10:59 am
GrowthSeeker wrote: Tue Mar 26, 2019 9:53 am In the OP the huge difference between Scenarios 1-6 vs the different SPIA plans is the effect on Net Worth.

With the SPIA, your original $1,000,000 is gone.
With the withdrawal rate Scenarios, you still have whatever the Million Dollars has grown to or shrunk to.

Or did I miss something?
You are correct stating net worth is gone with SPIA, but in the 1966 and 2000 scenarios those cohorts would have close to zero balance remaining as well.
Also some retirees are likely to consider dying with $0.00 net worth is a feature, not a bug.
As long as they know their DOD in advance, it's a great feature.
Well, you have to pick your poison. If you want to use a 3% or lower WR, you're likely to leave behind more than you started with, meaning that you could have spent significantly more than you did. Is that a feature or a bug? It's all in the eye of the beholder.
We are circling back to 3% will likely leave you more than you started. I predict that in the near future,we will continue to see more articles 3% is too risky. :oops:

Not to hijack my own thread, but do the SWR's touted already include the advisers fee? (meaning 4% SWR = 3% net to retiree assuming 1% fee).
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Re: Why take the risk with equities?

Post by willthrill81 »

Time2Quit wrote: Tue Mar 26, 2019 12:06 pm Not to hijack my own thread, but do the SWR's touted already include the advisers fee? (meaning 4% SWR = 3% net to retiree assuming 1% fee).
No. Fees, taxes, etc. must all be subtracted from the SWR.
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Re: Why take the risk with equities?

Post by Admiral »

Time2Quit wrote: Tue Mar 26, 2019 12:06 pm
willthrill81 wrote: Tue Mar 26, 2019 11:54 am
gmaynardkrebs wrote: Tue Mar 26, 2019 11:44 am
vineviz wrote: Tue Mar 26, 2019 11:38 am
Time2Quit wrote: Tue Mar 26, 2019 10:59 am

You are correct stating net worth is gone with SPIA, but in the 1966 and 2000 scenarios those cohorts would have close to zero balance remaining as well.
Also some retirees are likely to consider dying with $0.00 net worth is a feature, not a bug.
As long as they know their DOD in advance, it's a great feature.
Well, you have to pick your poison. If you want to use a 3% or lower WR, you're likely to leave behind more than you started with, meaning that you could have spent significantly more than you did. Is that a feature or a bug? It's all in the eye of the beholder.
We are circling back to 3% will likely leave you more than you started. I predict that in the near future,we will continue to see more articles 3% is too risky. :oops:

Not to hijack my own thread, but do the SWR's touted already include the advisers fee? (meaning 4% SWR = 3% net to retiree assuming 1% fee).
Let's consider some numbers. Let's say it's a professional couple that's worked 30-35 years (each) with combined salaries of $200k. Let's say their nest egg is $1m. Let's also say they have kids (and have had associated expenses) and have saved 15%, but not for their entire careers. So, they've been living on let's say $120k after taxes and savings, and they have a $2500/mo mortgage. Let's assume they have SS but no pensions.

3% of $1m = $30,000
SS #1: $30,000
SS #2: $30,000

TOTAL income: $90,000 before taxes. The mortgage is gone, saving them $30,000 per year. They are now living on 100% of what they required before retirement (excluding the house, which is now paid off). Take out taxes and they are maybe 80-90% of what they lived on before.

Where is the risk for this couple? Now, there are of course many objections: They are not illustrative of the middle class (that's true, but most retirees have almost nothing in retirement accounts), they have higher than average social security (also true, but they were well compensated). They may have $20k per year in healthcare costs (true, but they have no mortgage, so it evens out).

You can play around with amounts and SS. But remember this is a 3% WR.

If they had 500k instead of $1m, subtract $15k per year. They are still close to what they lived on before. Will they live extravagantly? No. But they will live on $6k per month.
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Re: Why take the risk with equities?

Post by TN_Boy »

market timer wrote: Tue Mar 26, 2019 10:41 am
Admiral wrote: Tue Mar 26, 2019 10:34 amAnd if the annuitant dies relatively young? What happens to the surviving spouse? What are they living on if the money is gone?
Given that expenses increase with number of people in the household, I believe it would be most efficient for the household to buy three policies:
1. Joint with survivor benefit: To cover fixed expenses that don't depend on number of people in the household (e.g., property taxes).
2. Individual with no survivor benefits for him: To cover expenses tied to his consumption (e.g., food, health care).
3. Individual with no survivor benefits for her: To cover expenses tied to her consumption.
Admiral wrote: Tue Mar 26, 2019 10:34 amI agree that VPW is what most retirees do (even if they don't call it that). When a dual-earning couple has a job loss, they cut back on expenses (as much as they can). Same thing with retirees who face poor market returns. Again, if we're speaking of your proverbial couple where SS and the returns on their 500k barely meet there needs, they may want to annuitize some. But all?
Yes, I'd suggest annuitizing it all except the emergency fund. The vast majority of retirees should not be in the stock market.
Well your last sentence is obviously controversial. You seem to have a very extreme view of the stock market. Then again, based on your posts, your are a bit of an outlier here (that is not meant as a putdown, merely a statement of fact).

My point is that you must do an awesome job defending your assertion that "retirees shouldn't be in the stock market" before anyone should take your annuity recommendations seriously.

Unless our couple with 500k had no SS income at all, they would be crazy to annuitize everything except an emergency fund. Unless the "emergency fund" is about 250k...

I like Milevsky's take on annuities: https://www.onefpa.org/journal/Pages/DE ... Tower.aspx

An entertaining read and worth the time. He does talk about the possibility of being over-annuitized.
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Re: Why take the risk with equities?

Post by garlandwhizzer »

I am not a fan of annuities except with a small/modest portion of the portfolio, SPIA only due to lower fee/cost structure, and with purchase deferred as long as possible hopefully until age greater than 70. Annuities do provide some degree of longevity/dementia insurance although over long time frames inflation can greatly diminish the real value of their nominal payments. Investors don't worry much about inflation now--it has been declining for 37 years--but no one can accurately predict its course over the next 2 decades. Annuities are also lousy long term investments relative to a balanced portfolio which with equity exposure offers some long term inflation protection locked in. Inflation adjusted annuities which in theory are quite attractive for investors are not widely offered. They are good for investors, not so good for the companies that offer them, the opposite of the story nominal annuities. Like all products that guarantee long term nominal income streams, if there's a long anticipated time horizon possibly 30+ years they offer only the illusion of safety not the real thing. A TIPS ladder offers the real thing. For a small/modest portion of the portfolio a SPIA purchased when one is already elderly (reducing inflation risk and increasing monthly payout by reducing duration) and still healthy (probably going to outlive longevity statistics) seems to me an attractive situation in which to use these products.

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Re: Why take the risk with equities?

Post by ResearchMed »

willthrill81 wrote: Tue Mar 26, 2019 10:24 am
DrGoogle2017 wrote: Tue Mar 26, 2019 10:19 am I’m still mulling about annuities for a small portion of my husband’s account. Maybe deferred annuities for longevity insurance, also for avoid paying taxes on RMDs, and avoiding senior fraudulent scams when we’re old and stupid, plus simplifying money management for my kids when we’re old.
I put in $50K at age 70 and get $1500 a month at age 80 for male seems too good to be true.
But I’m been reading high fees, no COLA growth, etc.. so I’m still on the fence, or we still have time to think about this. I know I can do the same thing with CDs but who wants to deal with this when I’m in my 80s.
I don't believe that any insurance company sells a deferred annuity with a COLA. If you're interested in that sort of thing, a better strategy would be to invest the funds you would annuitize in TIPS that will mature close to the time you would buy the SPIA, then use those funds to buy the SPIA when you reach your desired age (e.g. 80).
This makes sense in terms of the inflation concern, but then there is no mortality credit to be gained during the delay, which is often a desired feature of SPIAs.
That is, of course, a mixed bag: Anyone who has died has the money still available for heirs, IF that is a desire.
Those that are still alive are the ones who miss out on those credits from those who didn't make it, etc.

There should still be the mortality credits moving forward from age 80, but those from ages 70-80 are missed.

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Re: Why take the risk with equities?

Post by CWRadio »

A little off subject, would you take one of these new DNA tests that tells you your biological age as compared to your chronological age before buying a SPIA?
Recent interview about this subject with Dr. Moshe Milevsky is at ThinkAdvisor.

https://www.thinkadvisor.com/2019/03/22 ... k-you-are/

Paul
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Re: Why take the risk with equities?

Post by willthrill81 »

CWRadio wrote: Tue Mar 26, 2019 1:28 pm A little off subject, would you take one of these new DNA tests that tells you your biological age as compared to your chronological age before buying a SPIA?
Recent interview about this subject with Dr. Moshe Milevsky is at ThinkAdvisor.

https://www.thinkadvisor.com/2019/03/22 ... k-you-are/

Paul
Anything that can reliably improve your estimate of your own longevity could be useful. Whether this qualifies as reliable remains to be seen, IMHO.
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Re: Why take the risk with equities?

Post by willthrill81 »

ResearchMed wrote: Tue Mar 26, 2019 1:15 pm
willthrill81 wrote: Tue Mar 26, 2019 10:24 am
DrGoogle2017 wrote: Tue Mar 26, 2019 10:19 am I’m still mulling about annuities for a small portion of my husband’s account. Maybe deferred annuities for longevity insurance, also for avoid paying taxes on RMDs, and avoiding senior fraudulent scams when we’re old and stupid, plus simplifying money management for my kids when we’re old.
I put in $50K at age 70 and get $1500 a month at age 80 for male seems too good to be true.
But I’m been reading high fees, no COLA growth, etc.. so I’m still on the fence, or we still have time to think about this. I know I can do the same thing with CDs but who wants to deal with this when I’m in my 80s.
I don't believe that any insurance company sells a deferred annuity with a COLA. If you're interested in that sort of thing, a better strategy would be to invest the funds you would annuitize in TIPS that will mature close to the time you would buy the SPIA, then use those funds to buy the SPIA when you reach your desired age (e.g. 80).
This makes sense in terms of the inflation concern, but then there is no mortality credit to be gained during the delay, which is often a desired feature of SPIAs.
That is, of course, a mixed bag: Anyone who has died has the money still available for heirs, IF that is a desire.
Those that are still alive are the ones who miss out on those credits from those who didn't make it, etc.

There should still be the mortality credits moving forward from age 80, but those from ages 70-80 are missed.

RM
I'm not sure that the mortality credits would be worth the inflation risk. Despite the historically low inflation we've experienced over the last 20 years, the value of a dollar has been cut by more than a third over that period.

Further, the real risk with deferred annuities is that you won't survive to collect any payments at all. Three of my four grandparents died well before age 80: 43, 48, and 72. My last grandmother will probably not make it to age 84. Of course, that's the nature of the 'game' when it comes to lifetime annuities, but still, the risk is not to be underestimated. I think that too many here are 'worried' about living to age 100 or beyond. Perhaps medical advancements will allow for that to be a real possibility at some point, but I've heard that song and dance before. My hoverboard is already four years late.

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phxjcc
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Re: Why take the risk with equities?

Post by phxjcc »

HomerJ wrote: Tue Mar 26, 2019 10:09 am Look guys, I agree with you that a SPIA is a terrible investment.

The payout is not a return.

Any money put into a SPIA is GONE. There is nothing for heirs.

But if you want to safely spend more money in retirement, a SPIA is useful.

If someone is so petrified of running out of money that they only feel safe using a 3% withdrawal rate, then a SPIA might be a useful tool to increase spending in retirement.

To address will's point, they are already locking themselves into worse than the worst historical period.

I didn't say SPIAs are a general great tool, but the more one drops their SWR, the more attractive a SPIA becomes.

A 60-year old with $1 million might only feel comfortable pulling $30,000 a year.

With a 6% SPIA, they could annuitize $250,000, get $15,000 a year, and then pull 3% from the other $750,000, for another $22,500.

That gives them $37,500 a year or 25% more spending a year.
Am I stupid?
Misunderstanding something?
Age 66.

I have 2 degenerative diseases, per CDC actuarial tables I am between 1 and 2 standard deviations of life expectancy.
IOW, I should be gone within 10 years, at 82 I go to 3 STDEV.

So, WTH would I buy an SPIA?

Just want to make sure that I am not missing something.

Thanks.
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willthrill81
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Re: Why take the risk with equities?

Post by willthrill81 »

phxjcc wrote: Tue Mar 26, 2019 3:00 pm
HomerJ wrote: Tue Mar 26, 2019 10:09 am Look guys, I agree with you that a SPIA is a terrible investment.

The payout is not a return.

Any money put into a SPIA is GONE. There is nothing for heirs.

But if you want to safely spend more money in retirement, a SPIA is useful.

If someone is so petrified of running out of money that they only feel safe using a 3% withdrawal rate, then a SPIA might be a useful tool to increase spending in retirement.

To address will's point, they are already locking themselves into worse than the worst historical period.

I didn't say SPIAs are a general great tool, but the more one drops their SWR, the more attractive a SPIA becomes.

A 60-year old with $1 million might only feel comfortable pulling $30,000 a year.

With a 6% SPIA, they could annuitize $250,000, get $15,000 a year, and then pull 3% from the other $750,000, for another $22,500.

That gives them $37,500 a year or 25% more spending a year.
Am I stupid?
Misunderstanding something?
Age 66.

I have 2 degenerative diseases, per CDC actuarial tables I am between 1 and 2 standard deviations of life expectancy.
IOW, I should be gone within 10 years, at 82 I go to 3 STDEV.

So, WTH would I buy an SPIA?

Just want to make sure that I am not missing something.

Thanks.
Those who have strong evidence to suggest that they will not live longer than the average person would likely do well to avoid lifetime annuities. Nobody here at least is saying that they are for everybody, AFAIK.
“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
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