Why take the risk with equities?

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Shamb3
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Re: Why take the risk with equities?

Post by Shamb3 »

As a accumulator, because It would take me forever to reach my retirement number without them.

3-4% is the worst case low side of possibilities and failures are mostly due to bad early sequence of returns, which can be mitigated.
DonIce
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Re: Why take the risk with equities?

Post by DonIce »

willthrill81 wrote: Tue Mar 26, 2019 2:50 pm 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.
This chart looks a lot more stable to me than stock market returns. If the previous 150+ years of history indicates that stock markets will likely continue their longterm upward trend, why don't you also think that the previous 150+ years of history also indicates that life expectancy will continue its longterm upward trend? Keep in mind people in the top 10% of income/wealth have an extra ~10 years of life expectancy, too.

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willthrill81
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Re: Why take the risk with equities?

Post by willthrill81 »

DonIce wrote: Tue Mar 26, 2019 3:45 pm
willthrill81 wrote: Tue Mar 26, 2019 2:50 pm 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.
This chart looks a lot more stable to me than stock market returns. If the previous 150+ years of history indicates that stock markets will likely continue their longterm upward trend, why don't you also think that the previous 150+ years of history also indicates that life expectancy will continue its longterm upward trend? Keep in mind people in the top 10% of income/wealth have an extra ~10 years of life expectancy, too.
First, we must be very careful with extrapolating historic trends into the future. It might be appropriate, but it might not be.

Most of the increase in life expectancy in that chart is due to younger people living longer, not older people living longer, although older people are living longer.

The chart below using data from England and Wales depicts this very well. The slope of life expectancy has been much steeper for younger people than older people. In 1850, the life expectancy of a 70 year old was about 77, while it's about 87 today, a 10 year increase. Compare that to the life expectancy of a 20 year old, which was about 60 in 1850 but is now about 82, a 22 year increase. Also, note that the life expectancy of a 70 year barely moved until around 1950, despite the substantial lengthening of young people's life expectancy from 1850-1950.

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Even if we optimistically only base the trend in 70 year olds' life expectancy from that graph increasing since 1950, it took 63 years for them to gain just 7 years of life (i.e. 80 to 87), a 9 to 1 ratio. At that rate, it will take another 117 years for the median life expectancy of a 70 year old to reach age 100. Will that ever happen, or will it happen much sooner? I don't know, but the data do not suggest that it will happen anytime soon.
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patrick
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Re: Why take the risk with equities?

Post by patrick »

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.
The site mentioned above (immediateannuities.com) will provide CPI adjusted quotes if you change the settings on the second page of the quote search. The current CPI adjusted payout rate looks to be 4.7% for a 65 year old male and 4.39% for a 65 year old female, in both cases from the Principal which is the only company it shows for this annuity type.
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vineviz
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Re: Why take the risk with equities?

Post by vineviz »

phxjcc wrote: Tue Mar 26, 2019 3:00 pm 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.
You probably SHOULDN'T buy a SPIA. As willthrill says, you likely aren't the target use case.

If you don't mind though, just for discussion's sake, I'd like to suggest one possible way you might use a single premium deferred annuity. I'm not recommending you do this, FWIW, just illustrating how someone in your situation MIGHT use such a thing.

Someone at age 66 who genuinely and reasonably expects to be "gone" by age 76 might decide that they want to spend as much of their wealth over the next ten years as is feasible. Traveling, visiting family, contributing to charities they want to interact with, etc.

Such a person might estimate the minimal monthly income they might need after age 76 IF they lived that long and then, after subtracting out their expected Social Security income, buy a deferred annuity that provided that income stream. Most likely this annuity would either be joint with a spouse and/or include a cash refund rider, with an heir/loved one/charity as beneficiary.

With this "longevity insurance" purchased, this person might feel free to spend the vast majority of their wealth over the course of their expected life. Maybe just withdraw and spend 1/10 of the portfolio every year in whatever way made them feel happy, knowing that if they got "lucky" and hit that 3 std dev expectancy they'd have a sufficient income to fall back on.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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willthrill81
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Re: Why take the risk with equities?

Post by willthrill81 »

patrick wrote: Tue Mar 26, 2019 4:53 pm
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.
The site mentioned above (immediateannuities.com) will provide CPI adjusted quotes if you change the settings on the second page of the quote search. The current CPI adjusted payout rate looks to be 4.7% for a 65 year old male and 4.39% for a 65 year old female, in both cases from the Principal which is the only company it shows for this annuity type.
Thank you.
“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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Time2Quit
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Re: Why take the risk with equities?

Post by Time2Quit »

A 4.7% cpi payout makes a case for annuities in certain situations.

From what I gather those situations would be:

1.) You are risk averse
2.) You have no heirs and plan to spend to $0
3.) You think you will beat the actuarial tables and live a long time.
4.) You believe future market returns will be less than the past and you can not withdraw more than 4%.
"It is not the man who has too little, but the man who craves more, that is poor." --Seneca
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willthrill81
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Re: Why take the risk with equities?

Post by willthrill81 »

Time2Quit wrote: Tue Mar 26, 2019 5:54 pm A 4.7% cpi payout makes a case for annuities in certain situations.

From what I gather those situations would be:

1.) You are risk averse
2.) You have no heirs and plan to spend to $0
3.) You think you will beat the actuarial tables and live a long time.
4.) You believe future market returns will be less than the past and you can not withdraw more than 4%.
Add to that list "You are comfortable giving a significant portion of your portfolio to an insurance company."
“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
DonIce
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Re: Why take the risk with equities?

Post by DonIce »

willthrill81 wrote: Tue Mar 26, 2019 6:00 pm Add to that list "You are comfortable giving a significant portion of your portfolio to an insurance company."
Yeah I don't think I would ever consider it, just for this reason. You just spent ~40 years saving for retirement with a method that involved maximizing your diversification across thousands of companies and multiple asset classes. And now you are gonna take all (or most) of what you accumulated and just hand it over to one company? No thanks.
From what I gather those situations would be:

1.) You are risk averse
2.) You have no heirs and plan to spend to $0
3.) You think you will beat the actuarial tables and live a long time.
4.) You believe future market returns will be less than the past and you can not withdraw more than 4%.
If future market returns are significantly less than historical averages all the insurance companies that are paying out annuities are gonna run out of money, cause they are all assuming historical returns continue. They will convince/require their customers to take lower payments, or they'll go out of business. I think the risk of entrusting your future to the fortunes of one company (even if it is backed by a reinsurer, that's now two companies) is a far higher risk than staying the course with diversified stock and bond investments.
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Re: Why take the risk with equities?

Post by phxjcc »

Will,
Thanks.
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Re: Why take the risk with equities?

Post by Smoke »

Please excuse my ignorance on the subject of annuities as I ask a question.
I have read the posts and weighed the opinions.
Not arguing one side or the other...but

If diversification like in the Total Stock market is a good thing because of the many many companies mellowing out the ones that do badly and or fail...
How is putting a huge chunk or almost all (which some argue) of one's savings (excluding emergency) into one, five or ten companies holding the annuity(s) not taking on the risk of only a few companies and I am assuming all are in the same sector (insurance) ?

I understand, I think, those companies invest broadly but they are still the one holding company, and if they go belly up?

Like I said I really don't know enough about it to argue, and I am not trying to.
Arguing for the sake of arguing is something I am not going to engage in.
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snackdog
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Re: Why take the risk with equities?

Post by snackdog »

Everyone seems to forget that the same studies which established 4% inflation-adjusted SWR as "safe" also said without adjusting for inflation, one could use a SWR of 7%. 7% > 6% therefore superior to SPIA.
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Re: Why take the risk with equities?

Post by michaeljc70 »

For those that are uncomfortable with a 3%+ SWR they should ask themselves how a company can offer more and still make a profit. Obviously it isn't common, but if you bought the SPIA and died in the first few years that would suck. I assume most people have someone they'd rather leave the money to than a corporation.
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Re: Why take the risk with equities?

Post by sailaway »

michaeljc70 wrote: Tue Mar 26, 2019 8:02 pm For those that are uncomfortable with a 3%+ SWR they should ask themselves how a company can offer more and still make a profit. Obviously it isn't common, but if you bought the SPIA and died in the first few years that would suck. I assume most people have someone they'd rather leave the money to than a corporation.
Or, you could look into SPIA like gifting. If there is a large charity you are considering leaving your money to, talk to their planning department. You get all kinds of things in the mail when you buy two family passes in one household.
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willthrill81
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Re: Why take the risk with equities?

Post by willthrill81 »

Smoke wrote: Tue Mar 26, 2019 7:09 pm Please excuse my ignorance on the subject of annuities as I ask a question.
I have read the posts and weighed the opinions.
Not arguing one side or the other...but

If diversification like in the Total Stock market is a good thing because of the many many companies mellowing out the ones that do badly and or fail...
How is putting a huge chunk or almost all (which some argue) of one's savings (excluding emergency) into one, five or ten companies holding the annuity(s) not taking on the risk of only a few companies and I am assuming all are in the same sector (insurance) ?

I understand, I think, those companies invest broadly but they are still the one holding company, and if they go belly up?

Like I said I really don't know enough about it to argue, and I am not trying to.
The thought is that since the insurance companies are investing the premiums paid for SPIAs into government-backed securities, they are unlikely to go bankrupt in the first place. And if they do, your state's guaranty association may step to take over the policy, but there are limits involved ($300k in my state). How much safer that overall setup is than a balanced portfolio is at least partly a matter of opinion.
“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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market timer
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Re: Why take the risk with equities?

Post by market timer »

michaeljc70 wrote: Tue Mar 26, 2019 8:02 pm For those that are uncomfortable with a 3%+ SWR they should ask themselves how a company can offer more and still make a profit. Obviously it isn't common, but if you bought the SPIA and died in the first few years that would suck. I assume most people have someone they'd rather leave the money to than a corporation.
It is precisely this risk of early death that allows insurance companies to offer guaranteed withdrawal rates well above what you can get in the financial markets. Personally, it doesn't bother me that an insurance company might benefit from my early demise.
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Re: Why take the risk with equities?

Post by michaeljc70 »

market timer wrote: Tue Mar 26, 2019 9:07 pm
michaeljc70 wrote: Tue Mar 26, 2019 8:02 pm For those that are uncomfortable with a 3%+ SWR they should ask themselves how a company can offer more and still make a profit. Obviously it isn't common, but if you bought the SPIA and died in the first few years that would suck. I assume most people have someone they'd rather leave the money to than a corporation.
It is precisely this risk of early death that allows insurance companies to offer guaranteed withdrawal rates well above what you can get in the financial markets. Personally, it doesn't bother me that an insurance company might benefit from my early demise.
I'll take my chances and adjust my spending accordingly if needed. I haven't found many situations in life where involving a middle man actually saves you money.
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gmaynardkrebs
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Re: Why take the risk with equities?

Post by gmaynardkrebs »

michaeljc70 wrote: Tue Mar 26, 2019 9:19 pm I haven't found many situations in life where involving a middle man actually saves you money.
So true. That's why I grow all my own food, build all my own cars, and sew all my own suits.
Last edited by gmaynardkrebs on Tue Mar 26, 2019 9:42 pm, edited 1 time in total.
michaeljc70
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Re: Why take the risk with equities?

Post by michaeljc70 »

gmaynardkrebs wrote: Tue Mar 26, 2019 9:39 pm
michaeljc70 wrote: Tue Mar 26, 2019 9:19 pm
market timer wrote: Tue Mar 26, 2019 9:07 pm
michaeljc70 wrote: Tue Mar 26, 2019 8:02 pm For those that are uncomfortable with a 3%+ SWR they should ask themselves how a company can offer more and still make a profit. Obviously it isn't common, but if you bought the SPIA and died in the first few years that would suck. I assume most people have someone they'd rather leave the money to than a corporation.
It is precisely this risk of early death that allows insurance companies to offer guaranteed withdrawal rates well above what you can get in the financial markets. Personally, it doesn't bother me that an insurance company might benefit from my early demise.
I'll take my chances and adjust my spending accordingly if needed. I haven't found many situations in life where involving a middle man actually saves you money.
That's why I grow all my own food, build all my own cars, and make all my own suits.
I hope you aren't being serious comparing things that would be next to impossible for most individuals to do to things that are easy for an individual to do.
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Re: Why take the risk with equities?

Post by vineviz »

gmaynardkrebs wrote: Tue Mar 26, 2019 9:39 pm
michaeljc70 wrote: Tue Mar 26, 2019 9:19 pm I'll take my chances and adjust my spending accordingly if needed. I haven't found many situations in life where involving a middle man actually saves you money.
That's why I grow all my own food, build all my own cars, and make all my own suits.
I recently removed my own appendix: decided I didn't need a surgeon taking his cut after I found a perfectly good blade in the garage. The rust came right off with WD-40, even!
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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gmaynardkrebs
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Re: Why take the risk with equities?

Post by gmaynardkrebs »

vineviz wrote: Tue Mar 26, 2019 9:42 pm
gmaynardkrebs wrote: Tue Mar 26, 2019 9:39 pm
michaeljc70 wrote: Tue Mar 26, 2019 9:19 pm I'll take my chances and adjust my spending accordingly if needed. I haven't found many situations in life where involving a middle man actually saves you money.
That's why I grow all my own food, build all my own cars, and make all my own suits.
I recently removed my own appendix: decided I didn't need a surgeon taking his cut after I found a perfectly good blade in the garage. The rust came right off with WD-40, even!
Righto -- who needs health insurance!
HEDGEFUNDIE
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Re: Why take the risk with equities?

Post by HEDGEFUNDIE »

michaeljc70 wrote: Tue Mar 26, 2019 9:41 pm
gmaynardkrebs wrote: Tue Mar 26, 2019 9:39 pm
michaeljc70 wrote: Tue Mar 26, 2019 9:19 pm
market timer wrote: Tue Mar 26, 2019 9:07 pm
michaeljc70 wrote: Tue Mar 26, 2019 8:02 pm For those that are uncomfortable with a 3%+ SWR they should ask themselves how a company can offer more and still make a profit. Obviously it isn't common, but if you bought the SPIA and died in the first few years that would suck. I assume most people have someone they'd rather leave the money to than a corporation.
It is precisely this risk of early death that allows insurance companies to offer guaranteed withdrawal rates well above what you can get in the financial markets. Personally, it doesn't bother me that an insurance company might benefit from my early demise.
I'll take my chances and adjust my spending accordingly if needed. I haven't found many situations in life where involving a middle man actually saves you money.
That's why I grow all my own food, build all my own cars, and make all my own suits.
I hope you aren't being serious comparing things that would be next to impossible for most individuals to do to things that are easy for an individual to do.
The point they are making is that you can't do on your own what insurance companies do, namely spread your risk of living longer across millions of other people.

Annuities are all about the mortality credits.
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Re: Why take the risk with equities?

Post by Smoke »

willthrill81 wrote: Tue Mar 26, 2019 8:09 pm
Smoke wrote: Tue Mar 26, 2019 7:09 pm Please excuse my ignorance on the subject of annuities as I ask a question.
I have read the posts and weighed the opinions.
Not arguing one side or the other...but

If diversification like in the Total Stock market is a good thing because of the many many companies mellowing out the ones that do badly and or fail...
How is putting a huge chunk or almost all (which some argue) of one's savings (excluding emergency) into one, five or ten companies holding the annuity(s) not taking on the risk of only a few companies and I am assuming all are in the same sector (insurance) ?

I understand, I think, those companies invest broadly but they are still the one holding company, and if they go belly up?

Like I said I really don't know enough about it to argue, and I am not trying to.
The thought is that since the insurance companies are investing the premiums paid for SPIAs into government-backed securities, they are unlikely to go bankrupt in the first place. And if they do, your state's guaranty association may step to take over the policy, but there are limits involved ($300k in my state). How much safer that overall setup is than a balanced portfolio is at least partly a matter of opinion.
Thank you for that explanation :sharebeer
Arguing for the sake of arguing is something I am not going to engage in.
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stemikger
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Re: Why take the risk with equities?

Post by stemikger »

As Jack Bogle said you are going to have a very long and hard investing lifetime.
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!
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Re: Why take the risk with equities?

Post by edgeagg »

gmaynardkrebs wrote: Tue Mar 26, 2019 11:04 am
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.
So, other than COLA SPIA, retirees should simply watch their savings being inflated away? Why would they do that?
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Re: Why take the risk with equities?

Post by willthrill81 »

edgeagg wrote: Tue Mar 26, 2019 10:16 pm
gmaynardkrebs wrote: Tue Mar 26, 2019 11:04 am
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.
So, other than COLA SPIA, retirees should simply watch their savings being inflated away? Why would they do that?
Vanguard certainly doesn't endorse that view (i.e. everything in a SPIA). On the contrary, they recommend that no more than 25% of an investor's portfolio be allocated to a SPIA.
“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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Re: Why take the risk with equities?

Post by gmaynardkrebs »

edgeagg wrote: Tue Mar 26, 2019 10:16 pm
gmaynardkrebs wrote: Tue Mar 26, 2019 11:04 am
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.
So, other than COLA SPIA, retirees should simply watch their savings being inflated away? Why would they do that?
TIPS or TIPS ladders combined with COLA-annuities eliminates the inflation risk. Their have been a number of threads on how to implement such a strategy. One would do that to assure that you will not outlive your assets, and to have an safe standard of living during retirement. Once you have enough so that the risk running out of money is negligible (and i don't mean "just" a 5% chance,), you can be more aggressive or less aggressive as you wish.
Last edited by gmaynardkrebs on Tue Mar 26, 2019 10:53 pm, edited 1 time in total.
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Re: Why take the risk with equities?

Post by willthrill81 »

I hear a lot of talk about getting a CPI-linked SPIA, but I believe that Prudential is the only company that currently offers that product. That presents a real problem because the state guaranty associations seems to often have relatively low limits on how much they will cover in the insurer goes bankrupt. In my state, Washington, that limit is $300k. I don't believe that merely getting additional separate SPIAs would result in each being covered up to the limit the way that FDIC coverage works with bank accounts, but I could be wrong. Perhaps it's state-specific. Can someone please provide clarification about this?
“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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vineviz
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Re: Why take the risk with equities?

Post by vineviz »

edgeagg wrote: Tue Mar 26, 2019 10:16 pm
gmaynardkrebs wrote: Tue Mar 26, 2019 11:04 am
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.
So, other than COLA SPIA, retirees should simply watch their savings being inflated away? Why would they do that?
Inflation risk is always present when you start talking about investment or insurance vehicles that pay out in nominal terms, but it's very easy to exaggerate that risk.

1) Its' not reasonable to assume that retiree spending will inflate precisely along with CPI when we know that - on average - it doesn't.

2) The percentage of spending covered by Social Security, which is IS fully indexed to CPI, is another factor. If a large portion of spending is covered by these payments, the dangers of a nominal annuity are greatly diminished.

3) The percentage of your portfolio you annuitize is another factor. Retaining some percentage of your portfolio (up to 50%, say) in assets that directly (TIPS) or indirectly (short nominal bonds or equities) protect against unexpected inflation also helps reduce inflation risk.

4) Inflation risk cuts both way: by definition the risk of inflation being lower than expected is roughly equal to the risk of inflation being higher than expected. Lower-than-expected inflation is a bonus for people with nominal SPIAs.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Why take the risk with equities?

Post by tealeaves »

vineviz wrote: Wed Mar 27, 2019 6:09 am
edgeagg wrote: Tue Mar 26, 2019 10:16 pm
gmaynardkrebs wrote: Tue Mar 26, 2019 11:04 am
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.
So, other than COLA SPIA, retirees should simply watch their savings being inflated away? Why would they do that?
Inflation risk is always present when you start talking about investment or insurance vehicles that pay out in nominal terms, but it's very easy to exaggerate that risk.

1) Its' not reasonable to assume that retiree spending will inflate precisely along with CPI when we know that - on average - it doesn't.

2) The percentage of spending covered by Social Security, which is IS fully indexed to CPI, is another factor. If a large portion of spending is covered by these payments, the dangers of a nominal annuity are greatly diminished.

3) The percentage of your portfolio you annuitize is another factor. Retaining some percentage of your portfolio (up to 50%, say) in assets that directly (TIPS) or indirectly (short nominal bonds or equities) protect against unexpected inflation also helps reduce inflation risk.

4) Inflation risk cuts both way: by definition the risk of inflation being lower than expected is roughly equal to the risk of inflation being higher than expected. Lower-than-expected inflation is a bonus for people with nominal SPIAs.
Agree with this. I view for example one of the advantages of taking a non cola annuity vs. a lump sum retirement option from my employer as a hedge against deflation (or lower than expected inflation) along with addressing longevity risk. I assume my equities provide enough of an inflation hedge.
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Re: Why take the risk with equities?

Post by Time2Quit »

snackdog wrote: Tue Mar 26, 2019 7:40 pm Everyone seems to forget that the same studies which established 4% inflation-adjusted SWR as "safe" also said without adjusting for inflation, one could use a SWR of 7%. 7% > 6% therefore superior to SPIA.
I have not heard of read of SWR of 7% not adjusting for inflation as a viable option for retirement withdrawals, can you point me to a source?

Thanks
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Re: Why take the risk with equities?

Post by SovereignInvestor »

The annuity is identical to a pension. Interested to see if one worded it as mandatory pension if the reactions would be the same.
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Re: Why take the risk with equities?

Post by michaeljc70 »

Time2Quit wrote: Wed Mar 27, 2019 7:43 am
snackdog wrote: Tue Mar 26, 2019 7:40 pm Everyone seems to forget that the same studies which established 4% inflation-adjusted SWR as "safe" also said without adjusting for inflation, one could use a SWR of 7%. 7% > 6% therefore superior to SPIA.
I have not heard of read of SWR of 7% not adjusting for inflation as a viable option for retirement withdrawals, can you point me to a source?

Thanks
viewtopic.php?t=122705

At 75/25, 30 years, 7% withdrawal, non inflation adjusted shows 88% success rate.
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Re: Why take the risk with equities?

Post by gmaynardkrebs »

vineviz wrote: Wed Mar 27, 2019 6:09 am
edgeagg wrote: Tue Mar 26, 2019 10:16 pm
gmaynardkrebs wrote: Tue Mar 26, 2019 11:04 am
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.
So, other than COLA SPIA, retirees should simply watch their savings being inflated away? Why would they do that?
Inflation risk is always present when you start talking about investment or insurance vehicles that pay out in nominal terms, but it's very easy to exaggerate that risk.

1) Its' not reasonable to assume that retiree spending will inflate precisely along with CPI when we know that - on average - it doesn't.

2) The percentage of spending covered by Social Security, which is IS fully indexed to CPI, is another factor. If a large portion of spending is covered by these payments, the dangers of a nominal annuity are greatly diminished.

3) The percentage of your portfolio you annuitize is another factor. Retaining some percentage of your portfolio (up to 50%, say) in assets that directly (TIPS) or indirectly (short nominal bonds or equities) protect against unexpected inflation also helps reduce inflation risk.

4) Inflation risk cuts both way: by definition the risk of inflation being lower than expected is roughly equal to the risk of inflation being higher than expected. Lower-than-expected inflation is a bonus for people with nominal SPIAs.
I largely agree, except for # 4, which misses the key issue for inflation/deflation. The risks of unexpected inflation or deflation are highly asymmetric. 5% yearly deflation over a sustained period is almost inconceivable. The same cannot be said for 5% inflation or even higher. Moreover, there have been scores of historical episodes of sustained runaway or near-runaway inflation, but few, if any of similarly bad deflation. Even during the Great Depression, the majority of the deflation occurred in 1930-1932. In short, the deflation bonus, if any, is likely to be small and short lived, while risks of harm from higher than expected are almost boundless.
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Re: Why take the risk with equities?

Post by Top99% »

willthrill81 wrote: Tue Mar 26, 2019 11:27 am
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.
All roads do indeed carry risk. If things get bad enough for the 4% rule to fail I think the odds of insurances companies selling SPIAs going bankrupt would also be high and the state "SPIA" guarantee would just be a speed bump. While I certainly view SPIAs as a useful tool I wouldn't put 100% of my retirement nest egg into them. Same with TIPS since they provide no guarantee of keeping up with _our_ inflation rate. Invest and diversify I must. I can't think of any single asset class I would be comfortable putting more than 50% of my nest egg into.
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Re: Why take the risk with equities?

Post by gmaynardkrebs »

Top99% wrote: Wed Mar 27, 2019 8:22 am All roads do indeed carry risk. If things get bad enough for the 4% rule to fail I think the odds of insurances companies selling SPIAs going bankrupt would also be high and the state "SPIA" guarantee would just be a speed bump.
Many people are already saying that 3% is the new 4%. Are you predicting the imminent collapse of th insurance industry?
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Re: Why take the risk with equities?

Post by Admiral »

SovereignInvestor wrote: Wed Mar 27, 2019 7:54 am The annuity is identical to a pension. Interested to see if one worded it as mandatory pension if the reactions would be the same.
Say what? Our pension has cost us $30k in contributions and has a NPV of more than $700k. Explain how that is anything like an annuity. In addition to that, for a 15% reduction in payout, the spouse is covered for life if/when the pensioner dies.
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Re: Why take the risk with equities?

Post by michaeljc70 »

Call me skeptical when someone tells me there is a new normal, it is different this time or x is the new y.
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Re: Why take the risk with equities?

Post by gmaynardkrebs »

Admiral wrote: Wed Mar 27, 2019 9:58 am
SovereignInvestor wrote: Wed Mar 27, 2019 7:54 am The annuity is identical to a pension. Interested to see if one worded it as mandatory pension if the reactions would be the same.
Say what? Our pension has cost us $30k in contributions and has a NPV of more than $700k. Explain how that is anything like an annuity. In addition to that, for a 15% reduction in payout, the spouse is covered for life if/when the pensioner dies.
The difference is probably that your employer paid most of the premium. Otherwise, it is basically the same thing.
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Re: Why take the risk with equities?

Post by Admiral »

gmaynardkrebs wrote: Wed Mar 27, 2019 10:06 am
Admiral wrote: Wed Mar 27, 2019 9:58 am
SovereignInvestor wrote: Wed Mar 27, 2019 7:54 am The annuity is identical to a pension. Interested to see if one worded it as mandatory pension if the reactions would be the same.
Say what? Our pension has cost us $30k in contributions and has a NPV of more than $700k. Explain how that is anything like an annuity. In addition to that, for a 15% reduction in payout, the spouse is covered for life if/when the pensioner dies.
The difference is probably that yur employer paid most of the premium. Otherwise, it is the same.
I would say that is quite a significant difference. Annuity = surrender my own money.
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Re: Why take the risk with equities?

Post by marcopolo »

Admiral wrote: Wed Mar 27, 2019 10:08 am
gmaynardkrebs wrote: Wed Mar 27, 2019 10:06 am
Admiral wrote: Wed Mar 27, 2019 9:58 am
SovereignInvestor wrote: Wed Mar 27, 2019 7:54 am The annuity is identical to a pension. Interested to see if one worded it as mandatory pension if the reactions would be the same.
Say what? Our pension has cost us $30k in contributions and has a NPV of more than $700k. Explain how that is anything like an annuity. In addition to that, for a 15% reduction in payout, the spouse is covered for life if/when the pensioner dies.
The difference is probably that yur employer paid most of the premium. Otherwise, it is the same.
I would say that is quite a significant difference. Annuity = surrender my own money.
You did surrender your own money. It was part of your compensation from your employer. Not much different from matching 401k contributions from employer.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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Re: Why take the risk with equities?

Post by gmaynardkrebs »

Admiral wrote: Wed Mar 27, 2019 10:08 am
gmaynardkrebs wrote: Wed Mar 27, 2019 10:06 am
Admiral wrote: Wed Mar 27, 2019 9:58 am
SovereignInvestor wrote: Wed Mar 27, 2019 7:54 am The annuity is identical to a pension. Interested to see if one worded it as mandatory pension if the reactions would be the same.
Say what? Our pension has cost us $30k in contributions and has a NPV of more than $700k. Explain how that is anything like an annuity. In addition to that, for a 15% reduction in payout, the spouse is covered for life if/when the pensioner dies.
The difference is probably that yur employer paid most of the premium. Otherwise, it is the same.
I would say that is quite a significant difference. Annuity = surrender my own money.
It was your money, you just didn't look at it that way. The employer could have given you the premium as salary. (Tax consequences are a different discussion.)
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Re: Why take the risk with equities?

Post by Admiral »

gmaynardkrebs wrote: Wed Mar 27, 2019 10:20 am
Admiral wrote: Wed Mar 27, 2019 10:08 am
gmaynardkrebs wrote: Wed Mar 27, 2019 10:06 am
Admiral wrote: Wed Mar 27, 2019 9:58 am
SovereignInvestor wrote: Wed Mar 27, 2019 7:54 am The annuity is identical to a pension. Interested to see if one worded it as mandatory pension if the reactions would be the same.
Say what? Our pension has cost us $30k in contributions and has a NPV of more than $700k. Explain how that is anything like an annuity. In addition to that, for a 15% reduction in payout, the spouse is covered for life if/when the pensioner dies.
The difference is probably that yur employer paid most of the premium. Otherwise, it is the same.
I would say that is quite a significant difference. Annuity = surrender my own money.
It was your money, you just didn't look at it that way. The employer could have given you the premium as salary. (Tax consequences are a different discussion.)
Please point out an annuity that costs me $30,000 out of pocket and promises to pay me $30,000 per year for life---or my spouse $25,500. I will fork my money over today.
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Re: Why take the risk with equities?

Post by Admiral »

marcopolo wrote: Wed Mar 27, 2019 10:15 am
Admiral wrote: Wed Mar 27, 2019 10:08 am
gmaynardkrebs wrote: Wed Mar 27, 2019 10:06 am
Admiral wrote: Wed Mar 27, 2019 9:58 am
SovereignInvestor wrote: Wed Mar 27, 2019 7:54 am The annuity is identical to a pension. Interested to see if one worded it as mandatory pension if the reactions would be the same.
Say what? Our pension has cost us $30k in contributions and has a NPV of more than $700k. Explain how that is anything like an annuity. In addition to that, for a 15% reduction in payout, the spouse is covered for life if/when the pensioner dies.
The difference is probably that yur employer paid most of the premium. Otherwise, it is the same.
I would say that is quite a significant difference. Annuity = surrender my own money.
You did surrender your own money. It was part of your compensation from your employer. Not much different from matching 401k contributions from employer.
A defined contribution plan is nothing like a defined benefit plan in terms of its value and risk. And there is no alternate universe where the compensation would have been increased by $100k per year (or given as a match) for the same job to make up for the lack of the pension.
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Re: Why take the risk with equities?

Post by gmaynardkrebs »

Admiral wrote: Wed Mar 27, 2019 10:23 am
gmaynardkrebs wrote: Wed Mar 27, 2019 10:20 am
Admiral wrote: Wed Mar 27, 2019 10:08 am
gmaynardkrebs wrote: Wed Mar 27, 2019 10:06 am
Admiral wrote: Wed Mar 27, 2019 9:58 am

Say what? Our pension has cost us $30k in contributions and has a NPV of more than $700k. Explain how that is anything like an annuity. In addition to that, for a 15% reduction in payout, the spouse is covered for life if/when the pensioner dies.
The difference is probably that yur employer paid most of the premium. Otherwise, it is the same.
I would say that is quite a significant difference. Annuity = surrender my own money.
It was your money, you just didn't look at it that way. The employer could have given you the premium as salary. (Tax consequences are a different discussion.)
Please point out an annuity that costs me $30,000 out of pocket and promises to pay me $30,000 per year for life---or my spouse $25,500. I will fork my money over today.
You are not counting what your employer was paying.
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Re: Why take the risk with equities?

Post by Admiral »

gmaynardkrebs wrote: Wed Mar 27, 2019 10:39 am
Admiral wrote: Wed Mar 27, 2019 10:23 am
gmaynardkrebs wrote: Wed Mar 27, 2019 10:20 am
Admiral wrote: Wed Mar 27, 2019 10:08 am
gmaynardkrebs wrote: Wed Mar 27, 2019 10:06 am The difference is probably that yur employer paid most of the premium. Otherwise, it is the same.
I would say that is quite a significant difference. Annuity = surrender my own money.
It was your money, you just didn't look at it that way. The employer could have given you the premium as salary. (Tax consequences are a different discussion.)
Please point out an annuity that costs me $30,000 out of pocket and promises to pay me $30,000 per year for life---or my spouse $25,500. I will fork my money over today.
You are not counting what your employer was paying.
Why should I? That's irrelevant to me. If my employer wants to pay for an annuity, I am also happy to accept that. There was no job offer that went like this: "We can offer you $x salary with a pension, or $2x salary with a 401k in place of the pension."

In the annuity, I pay for the entire thing. In a pension, the employer (plus the market return) pays for the vast majority of it (really the entire thing after Year 1).
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Re: Why take the risk with equities?

Post by willthrill81 »

gmaynardkrebs wrote: Wed Mar 27, 2019 9:49 am
Top99% wrote: Wed Mar 27, 2019 8:22 am All roads do indeed carry risk. If things get bad enough for the 4% rule to fail I think the odds of insurances companies selling SPIAs going bankrupt would also be high and the state "SPIA" guarantee would just be a speed bump.
Many people are already saying that 3% is the new 4%. Are you predicting the imminent collapse of th insurance industry?
It's not that insurance industry would collapse, but the risk of your insurance company going bankrupt and your state's guaranty association reneging would likely be higher than now.

Look back at how many banks failed during the Great Depression, for instance, yet the '4% rule' succeeded. We would need a worse sequence of returns than that for the '4% rule' to fail, although admittedly we would not necessarily need economic conditions to be that poor. It's possible for "3% to become the new 4%" without economic Armageddon occurring.

Further, the "many people" claiming that "3% is the new 4%" do not know the future. At least some in that group were claiming a decade ago that stocks would have low single-digit returns for the upcoming decade, and we all know how that prediction turned out.
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Re: Why take the risk with equities?

Post by marcopolo »

Admiral wrote: Wed Mar 27, 2019 10:31 am
marcopolo wrote: Wed Mar 27, 2019 10:15 am
Admiral wrote: Wed Mar 27, 2019 10:08 am
gmaynardkrebs wrote: Wed Mar 27, 2019 10:06 am
Admiral wrote: Wed Mar 27, 2019 9:58 am

Say what? Our pension has cost us $30k in contributions and has a NPV of more than $700k. Explain how that is anything like an annuity. In addition to that, for a 15% reduction in payout, the spouse is covered for life if/when the pensioner dies.
The difference is probably that yur employer paid most of the premium. Otherwise, it is the same.
I would say that is quite a significant difference. Annuity = surrender my own money.
You did surrender your own money. It was part of your compensation from your employer. Not much different from matching 401k contributions from employer.
A defined contribution plan is nothing like a defined benefit plan in terms of its value and risk. And there is no alternate universe where the compensation would have been increased by $100k per year (or given as a match) for the same job to make up for the lack of the pension.
Where are you getting the value of it being $100k/year in compensation?
You say the current NPV is $700k, did you earn that pension from your employer in 5-6 years? Seems unlikely.
If it was over 20-30 years, then the annual equivalent benefit was much smaller.

Yes, there is tremendous value to a company provided pension. But, it did not not fall from the sky, it was part of the compensation you received in exchange for your years of service. Congratulations! :beer
Once in a while you get shown the light, in the strangest of places if you look at it right.
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Re: Why take the risk with equities?

Post by Admiral »

marcopolo wrote: Wed Mar 27, 2019 10:59 am
Admiral wrote: Wed Mar 27, 2019 10:31 am
marcopolo wrote: Wed Mar 27, 2019 10:15 am
Admiral wrote: Wed Mar 27, 2019 10:08 am
gmaynardkrebs wrote: Wed Mar 27, 2019 10:06 am The difference is probably that yur employer paid most of the premium. Otherwise, it is the same.
I would say that is quite a significant difference. Annuity = surrender my own money.
You did surrender your own money. It was part of your compensation from your employer. Not much different from matching 401k contributions from employer.
A defined contribution plan is nothing like a defined benefit plan in terms of its value and risk. And there is no alternate universe where the compensation would have been increased by $100k per year (or given as a match) for the same job to make up for the lack of the pension.
Where are you getting the value of it being $100k/year in compensation?
You say the current NPV is $700k, did you earn that pension from your employer in 5-6 years? Seems unlikely.
If it was over 20-30 years, then the annual equivalent benefit was much smaller.

Yes, there is tremendous value to a company provided pension. But, it did not not fall from the sky, it was part of the compensation you received in exchange for your years of service. Congratulations! :beer
Actually the NPV value is over $1.1m due to the payout beginning at age 60. There are various ways it can be calculated, I use the ones at Financial Samurai (https://www.financialsamurai.com/how-do ... y-pension/)

11+ years of service. It is generous, yes, but that's not really the point of the discussion.
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Re: Why take the risk with equities?

Post by MnD »

The problem is creating a lifetime virtually guaranteed static real income stream out of something with a high standard deviation in returns.
Both longevity risk and sequence of returns risk forces a ridiculously low SWR in order to "purchase" that guarantee to survive a bad sequence and do so for decades. Rather than continue to play the game of SWR limbo (how low can you go!) it might be more productive to just set a reasonable starting SWR and acknowledge that your retirement income from the equity side of portfolio is going to vary and plan accordingly with SS, bonds, annuities, pension or rental income if you have any ect.

For those bound and determined to stick to a "safe" 3% inflation-adjusted SWR, consider in a really bad sequence you could be withdrawing 10% of your remaining portfolio annually. That's what happened to 1966 retirees just 14 years in to retirement in 1981. I doubt anyone who is so conservative that they have decided that 3% is the best SWR would draw 10% of portfolio in terrible times. So might as well throw in the towel on the idea of a fixed "safe" SWR you can live with.

Most workers and retirees have little to nothing in retirement savings and in bad times a lot of things get cheaper (especially services) as people are desperate for work. So the typical Boglehead will be fine, even if they have to cut back in the event of lousy returns and sequences actually occurring in their own retirement sequences.
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