Your Retirement Number, or, calculating the funding ratio

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Dottie57
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Re: Your Retirement Number, or, calculating the funding ratio

Post by Dottie57 » Tue Jan 03, 2017 4:25 pm

I've plugged my numbers into excel. The results correlate to the lower/middle spending limits calculated in I-orp and firecalc. It is interesting to think about the retirement finance problem from a different perspective.

Thanks to Bobcat for interesting info. It is also good to have additional cnfirmation I will have a decent retirement.

Rodc
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Re: Your Retirement Number, or, calculating the funding ratio

Post by Rodc » Tue Jan 03, 2017 4:37 pm

Dottie57 wrote:I've plugged my numbers into excel. The results correlate to the lower/middle spending limits calculated in I-orp and firecalc. It is interesting to think about the retirement finance problem from a different perspective.

Thanks to Bobcat for interesting info. It is also good to have additional cnfirmation I will have a decent retirement.
This past weekend I updated my retirement readiness estimates using my "older" methods and this "new"method. I do agree it is interesting to think from a different directions.

It is also reassuring that the various standard methods, used in reasonable ways, are all in reasonable agreement.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

bcc1234
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Re: Your Retirement Number, or, calculating the funding ratio

Post by bcc1234 » Tue Jan 03, 2017 4:54 pm

http://www.calcxml.com/do/ret33


Just turned 55. My number is 3M. Counting some deferred compensation, we're there now. Will work another few years. I do like to use this website calculator. I use 75% of my current income in the calculations. For those that haven't used this, create the pdf report, it's a nice simple look at the "future".

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bobcat2
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Re: Your Retirement Number, or, calculating the funding ratio

Post by bobcat2 » Tue Jan 03, 2017 10:08 pm

Quotes from another thread where the funding ratio (FR) is discussed.
Unfortunately the funding ratio is based on funding retirement with a TIPS ladder which is going to be very tough with a 60 year horizon.
One can up the discount rate to say assume a higher return based on holding stocks and bonds.
The above quotes are apparently an extremely common misunderstanding of the funding ratio.

The funding ratio is not based on investing in TIPS.

The funding ratio is silent on the rate of return of the investment portfolio. To put it another way, if I have a $1 million portfolio its present value (PV) is $1 million, regardless of whether it is invested in TIPS, emerging market stocks, or the S&P 500 stock index. You don't get a higher PV for the portfolio because its invested in stocks rather than Tbills. Since the FR is concerned only with whether your liability is fully funded now, the FR doesn't care what the future rate of return on your investments will be.

The discount factor comes into play on the liabilities side - the PV of your targeted retirement income stream. A basic principle of finance is that if you really want to hit a financial target, in this case your targeted retirement income stream goal, then the discount rate must be safe. This has nothing to do with the portfolio's expected return. There is absolutely no connection between the expected return of the portfolio and the discount rate applied to the liabilities.

For a safe discount rate the duration of the asset must match the duration of the liability. Furthermore, since in this case the targeted retirement income stream is real, the matched asset needs to also be real. For US investors that matching asset is a LT TIPS bond. Currently to the nearest half percent the return on LT TIPS is 1%. That is how the 1% discount rate is derived. It is the safest discount rate in this case. Since we want to hit the goal with high probability we need to use a safe discount rate. If we instead use the expected return on a portfolio with a heavy allocation to stocks then we have roughly a 50% to 60% chance of reaching the target. Since we really want to meet the income goal - not maybe meet it - using the higher expected return of a risky portfolio as the discount rate is not appropriate.

The funding ratio is telling you if you are fully funded today. It is not making a projection of where you will be sometime in the future!

Zvi Bodie often talks about this in a pithy manner by making two points.
1) You cannot lower the PV of a liability by taking on more risk.
2) You can lower the PV of a liability by taking out a contingent contract.

Zvi's first point deal deals directly with the correct discount rate for retirement income.
Zvi's second point tells us why term life insurance is the cheapest way to deal with the financial consequences of a short life, and why life annuities are the cheapest way to deal with the financial consequences of a long life.

BobK

PS - I realize this is a somewhat subtle point that is not intuitively obvious. Parts of finance have that quality. I am pretty sure I struggled with this when I first ran across it. :) To me this is what makes finance intriguing. You have to think about what you are doing; you can't just memorize stuff.
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.

itstoomuch
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Re: Your Retirement Number, or, calculating the funding ratio

Post by itstoomuch » Wed Jan 04, 2017 12:34 am

bobcat2 wrote:Definition of your personal funding ratio The funding ratio* is the ratio of your assets to your liabilities. Funding ratios indicate whether you can cover all obligated payments to meet liabilities. Ratios below one reflect that you may be in jeopardy of being unable to make obligated payments at a later time.

*Some authors use the term funded ratio instead of funding ratio.

There are numerous threads at Bogleheads about how to arrive at your retirement number. No one number is sufficient for determining if you are on track to meet your retirement goals, but the best number to start with is the funding ratio.

The funding ratio is a simple concept. It is simply assets divided by liabilities. What you want is a ratio at least close to 1. If the ratio is above 1.2 you are overfunded, which is not necessary. The tricky part of calculating the funding ratio is that for liabilities, and at least some of the assets, you need to calculate the present values (PVs) of future streams of income.

Funding ratio is (PV assets)/(PV liabilities)
{...skip..}

IMO the funding ratio should be included in every monthly or quarterly 401k, 403b, and TSP report to recipients. The recipient provides the desired annual income from the retirement savings plan and the targeted retirement age, and the savings plan provider then calculates the PV of a life annuity for that income amount and, using that and the current value of the savings plan portfolio, reports the funding ratio for the participant.
BobK
FR=PV assets/PV liabilities
I always looked at Bobcat2's FR (funding ratio) as: current, FR= (DesiredIncome)/(ImmediateIncomeNeed) or
algebraic: ImmediateIncomeNeed=DesiredIncome/FR or
algebraic: DesiredIncome=ImmediateIncomeNeed * FR

If I wanted to look at the Future FR and retirement, I would have to make some assumptions: Steady Inflation rate, Steady growth rate, health & longevity, COL & standard-of-living adjustments, AND the dreaded, Safe-Withdrawal-Rate. :oops: All assumptions that no one can predict out 1,3,5,10,21,31 years (approx geometric years and errors).

The best I could do is to track my current FR and make adjustments to keep FR positive with an keep the FR increasingly positive on a near term, yearly basis.

Personally when I first joined BH, I was puzzled why so many are fixated on SWR~4%? What did 4% represent and most importantly 4% of what? :confused
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

Rodc
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Re: Your Retirement Number, or, calculating the funding ratio

Post by Rodc » Wed Jan 04, 2017 6:29 am

bobcat2 wrote:Quotes from another thread where the funding ratio (FR) is discussed.
Unfortunately the funding ratio is based on funding retirement with a TIPS ladder which is going to be very tough with a 60 year horizon.
One can up the discount rate to say assume a higher return based on holding stocks and bonds.
The above quotes are apparently an extremely common misunderstanding of the funding ratio.

The funding ratio is not based on investing in TIPS.

The funding ratio is silent on the rate of return of the investment portfolio. To put it another way, if I have a $1 million portfolio its present value (PV) is $1 million, regardless of whether it is invested in TIPS, emerging market stocks, or the S&P 500 stock index. You don't get a higher PV for the portfolio because its invested in stocks rather than Tbills. Since the FR is concerned only with whether your liability is fully funded now, the FR doesn't care what the future rate of return on your investments will be.

The discount factor comes into play on the liabilities side - the PV of your targeted retirement income stream. A basic principle of finance is that if you really want to hit a financial target, in this case your targeted retirement income stream goal, then the discount rate must be safe. This has nothing to do with the portfolio's expected return. There is absolutely no connection between the expected return of the portfolio and the discount rate applied to the liabilities.

For a safe discount rate the duration of the asset must match the duration of the liability. Furthermore, since in this case the targeted retirement income stream is real, the matched asset needs to also be real. For US investors that matching asset is a LT TIPS bond. Currently to the nearest half percent the return on LT TIPS is 1%. That is how the 1% discount rate is derived. It is the safest discount rate in this case. Since we want to hit the goal with high probability we need to use a safe discount rate. If we instead use the expected return on a portfolio with a heavy allocation to stocks then we have roughly a 50% to 60% chance of reaching the target. Since we really want to meet the income goal - not maybe meet it - using the higher expected return of a risky portfolio as the discount rate is not appropriate.

The funding ratio is telling you if you are fully funded today. It is not making a projection of where you will be sometime in the future!

Zvi Bodie often talks about this in a pithy manner by making two points.
1) You cannot lower the PV of a liability by taking on more risk.
2) You can lower the PV of a liability by taking out a contingent contract.

Zvi's first point deal deals directly with the correct discount rate for retirement income.
Zvi's second point tells us why term life insurance is the cheapest way to deal with the financial consequences of a short life, and why life annuities are the cheapest way to deal with the financial consequences of a long life.

BobK

PS - I realize this is a somewhat subtle point that is not intuitively obvious. Parts of finance have that quality. I am pretty sure I struggled with this when I first ran across it. :) To me this is what makes finance intriguing. You have to think about what you are doing; you can't just memorize stuff.
FWIW: Anyone can do what I did before posting. Write out the equations and verify the PV is just the inverse of compound growth (or just do it in your head, it is not hard if you do just a single time period). Then make a spreadsheet, build a "TIPS ladder" assuming some fixed real yield and verify the calculation agrees with the PV method funding ratio (assuming the same real yield) to the penny (that is double check the math you did in step 1)(see my reply to Dottie above). No surprise as the math behind both is identical. You are fully funded if and only if you can build a TIPS ladder with the assumed discount rate, which in this thread was chosen to be what you can get from a long term TIPS as Bob says way up thread. The PV method IS a model of using a TIPS ladder - the math is the math.

Added: if the funding ratio is not 1.0, say it is only 0.70, all this means is you can build a (model of a) TIPS ladder so that you get 70% of the income you wanted each year. For example in the opening post the desired real income was $70,000. If you found your funding ratio was 0.70 this means you could build a ladder of 1% real bonds that would give you $49,000 a year before you ran out of money in year 23.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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bobcat2
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Re: Your Retirement Number, or, calculating the funding ratio

Post by bobcat2 » Wed Jan 04, 2017 10:42 pm

Wildebeest wrote:The problem with calculating the funding ratio may be that it requires a paradigm/cognitive shift.

To me calculating the funding ratio is common sense. Of course if you can not afford to depend on the "number" as in that you cut it to close and and you may be victim to vicissitudes of stock market, bond markets or inflation, bad things may be bound to happen. ...

May be when our children reach our age, [they will] calculate the funding ratio.

If not, I hope that our children have saved a lot of money.
:thumbsup :thumbsup
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MIretired
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Re: Your Retirement Number, or, calculating the funding ratio

Post by MIretired » Fri Jan 06, 2017 4:12 pm

OP:
I never got your point/motivation of this thread.
1st I thought it was that we should add to the DOL fid. rule this requirement for a FR# on all retirement accounts;
Or this function/job should be added onto all fiduciary retirement plans;

Or we should all, starting at age 54 (with 30 yrs. life expectancy), buy TIPS ladders/funds in the amount of our PV of required retirement costs;

Or was it simply that this 'your PV rule?' is a baseline for retirement funding health?
???
Wondering if you were actually going anywhere with a math angle with this?

As far as "rule"; maybe the "4% rule", could have been coined, "the 4% backtest."

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bobcat2
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Re: Your Retirement Number, or, calculating the funding ratio

Post by bobcat2 » Fri Jan 06, 2017 5:30 pm

MIpreRetirey wrote:OP:
I never got your point/motivation of this thread.
For individuals from Kiplinger.
In planning for retirement, you have probably crunched many numbers: the value of your investment portfolio, the income stream from Social Security or a pension, your projected annual spending, and your life expectancy. What if you could distill all those figures into a single number that tells you whether you're on track for a secure retirement?

Some advisers and academics say the "funded ratio" allows you to do just that. To calculate this figure, you divide your total assets -- including the current value of your investment portfolio and the present value of future income such as Social Security -- by the present value of your total projected retirement spending. (Present value is the value of a future sum or income stream in today's dollars.)

If you arrive at a figure of more than 100%, your retirement plan is likely on sound footing. If it's less than 100%, you may need to think about working longer or reining in expenses.

The funded ratio "incorporates a lot of data and boils the answer down to a single stat," says Phill Rogerson, a managing director at Russell Investments, which is promoting the use of the funded ratio among financial advisers. By tracking the figure closely [over time], he says, retirees can "maximize the lifestyle they can live today while minimizing the probability they run out of money before they die." A rising or falling funded ratio can send a signal that your retirement plan is growing more secure or hurtling off a cliff.
Link - http://www.kiplinger.com/article/retire ... umber.html


For DC retirement savings plans from Jeremy Siegel, of all people, the stocks for the LR man :!: :)
That TIAA-CREF example reinforces the need for goal- or liability-driven investing. Forget about strategies. What is the risk-free rate for investors? You cannot know what risk is until you know the time frame of the investors.

Regarding the TIAA-CREF example, it is important to decide whether the pot is a savings account or a retirement account. It is hard to have
two different goals because they conflict. One calls for having principal stability, which is a Treasury bill. The other calls for standard-of-living and income stability, which is a long-term bond. You cannot have both.

If you get clients to focus on rates of return and asset mixes, it is likely to be the wrong approach. You should get people to determine their goals instead of asking them how much they want to put in real estate.

Everyone in this room knows what people want for retirement. It is an income. Social security gives an income. DB plans give an income. In DC plans, for some reason, we do not show people the funded ratio. We are showing them the wrong thing, and then we are saying they are making the wrong decisions. We are telling people that risk is the value of their fund, when risk is really how much income they can sustain for retirement. We must get that straight, and by “we” I am including the US Department of Labor and the SEC so that they do not force us to give people the wrong numbers.
Link - http://robertcmerton.com/publication/q- ... my-siegel/

BobK
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Re: Your Retirement Number, or, calculating the funding ratio

Post by JamesG » Sun Jan 08, 2017 1:59 pm

I see the point of the funding ratio (and indeed have now added it to my retirement calculations – thank you!), but I am not convinced that, on its own, it tells a complete story of how one stands today with respect to meeting one’s retirement income target.

This is because it seems to miss the value of future savings, and because its value is not benchmarked against where it should be at any point in time. If I understand this correctly, along the path to retirement, the funding ratio is typically below (but hopefully moving towards ) 1. But what its value should be at any point in a person’s trajectory between commencing employment and retiring is not computed (e.g., if I am 80% through my anticipated working career, should I be happy with a 0.8 funding ratio?). Does this not potentially leave the user of the funding ratio unclear on how they are tracking towards their retirement goal?

Every quarter I use excel to numerically solve variants of the following for my current expected retirement age (Tr). I think the following excel calculations are only a little more complicated than the funding ratio, and I wonder whether they might provide a better indicator of where one stands with regard to achieving one’s retirement income target at any given point in time?
(1) V = C ((1-(1+r)^-(Td-Tr))/r) (future value of annuity at retirement)
(2) W= A0(1+r)^(Tr-Tn) (future value of current assets)
(3) X=(Y-C)(((1+r)^(Tr-Tn)-1)/r) (future value of savings)
(4) V = W + X

where:
Y is post tax income
C is current consumption
A0 is the value of current assets
Td is anticipated Big T (likely age of death)
Tr is retirement age (endogenous to solve 4)
Tn is age now
r is a relevant real post-tax interest rate

In this calculation, I treat Y, C, A0, Td, Tn and r as given, and solve (1)-(4) for Tr.

Tr is the age at which we will have saved sufficient funds to maintain today’s consumption through to retirement and then on out to age Td. It is easily calculated via (1)-(4) using excel’s solver function. In any given quarter, if we see that Tr is drifting above our target retirement age, we try to reduce C. Via (1) this reduces the value of the annuity required at retirement and via (3) it increases savings. Both act to reduce Tr. And vice versa. If Tr is drifting below our retirement age target, then our annual consumption budget is too low (i.e. we are sacrificing too much today). The signal given by (1) to (4) is that a rise in C is possible given our retirement date target.

Every quarter I solve (1)-(4) (and variants with different bequest levels (omitted above), Td’s and r’s) for Tr. My wife and I are happy with Tr moving within the range 55-58 (we are in our late forties now, and have careers that we could plausibly continue into our late 60s).
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bobcat2
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Re: Your Retirement Number, or, calculating the funding ratio

Post by bobcat2 » Mon Jan 09, 2017 10:50 am

Hi JamesG,

The funding ratio (FR) is not a forecast. However, there is nothing that prevents a retirement investor from forecasting what the size of their portfolio will be sometime in the future (by whatever method they choose) and calculating the PV of the retirement income liability at that future time to see how they would be doing then via the FR.

What's important in that context is that, if a substantial portion of the portfolio is devoted to stocks, there should not only be a base case forecast for the portfolio, but also high and low forecasts as well. In the low case ask yourself, if this comes to pass, what are my options? The high case is easy, de-risk. :)

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.

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Re: Your Retirement Number, or, calculating the funding ratio

Post by ubermax » Mon Jan 09, 2017 12:35 pm

In today's world of pension funding the ratio of assets to liabilities is a very prominent calculation and so using it for an individual as the BobCat has suggested is reasonable .

I just have a few brief comments regarding the example with Larry playing the lead role :

The present value calculation of Larry's liability and the three asset components can all be done in one step ; recalling that a deferred annuity is just the difference of two non-deferred annuities , we have for Larry's liability the Excel formula =pv(.01,34,-70000) - pv(.01,12,-70000) , the first two asset valuations can be done similarly and the last calculation involving the reverse mortgage is simply =pv(.01,12,0,-120000) .

For Larry's employer pension where he assumes 2.5% inflation it appears that Bob is simply adding 2.5% to the 1.0% used in the former calculations to get 3.5% for the real rate of return ; I don't think this methodology is appropriate and I think it's important to know both the particular rate of inflation and the nominal rate of return that were assumed to produce the 1% real - an example : if inflation is assumed to be 2% and the nominal rate 3% , then the real return is roughly 1% - now if we increase assumed inflation by 1% making it now 3% , then the real return is 0% not 1% + 1% or 2% .

Before I retired I did a similar calculation but I just looked at amounts rather than the ratio of assets to liabilities ; my wife and I established a budget and I made some assumptions for future increases in SS and pension which were netted out of the budget amount to leave the required asset draw ; I assumed a nominal discount rate for all of those inflation adjusted inflows and compared the present value of future asset draws to our current assets ; I periodically repeat this calculation during retirement ; this is equivalent to Bob's approach and others may also find it to be a nice alternative way to see how well they stack up ; my spreadsheet also allows me to adjust the budget with an assumed inflation adjustment .

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Re: Your Retirement Number, or, calculating the funding ratio

Post by Rodc » Mon Jan 09, 2017 4:58 pm

JamesG wrote:I see the point of the funding ratio (and indeed have now added it to my retirement calculations – thank you!), but I am not convinced that, on its own, it tells a complete story of how one stands today with respect to meeting one’s retirement income target.

This is because it seems to miss the value of future savings, and because its value is not benchmarked against where it should be at any point in time. If I understand this correctly, along the path to retirement, the funding ratio is typically below (but hopefully moving towards ) 1. But what its value should be at any point in a person’s trajectory between commencing employment and retiring is not computed (e.g., if I am 80% through my anticipated working career, should I be happy with a 0.8 funding ratio?). Does this not potentially leave the user of the funding ratio unclear on how they are tracking towards their retirement goal?

Every quarter I use excel to numerically solve variants of the following for my current expected retirement age (Tr). I think the following excel calculations are only a little more complicated than the funding ratio, and I wonder whether they might provide a better indicator of where one stands with regard to achieving one’s retirement income target at any given point in time?
(1) V = C ((1-(1+r)^-(Td-Tr))/r) (future value of annuity at retirement)
(2) W= A0(1+r)^(Tr-Tn) (future value of current assets)
(3) X=(Y-C)(((1+r)^(Tr-Tn)-1)/r) (future value of savings)
(4) V = W + X

where:
Y is post tax income
C is current consumption
A0 is the value of current assets
Td is anticipated Big T (likely age of death)
Tr is retirement age (endogenous to solve 4)
Tn is age now
r is a relevant real post-tax interest rate

In this calculation, I treat Y, C, A0, Td, Tn and r as given, and solve (1)-(4) for Tr.

Tr is the age at which we will have saved sufficient funds to maintain today’s consumption through to retirement and then on out to age Td. It is easily calculated via (1)-(4) using excel’s solver function. In any given quarter, if we see that Tr is drifting above our target retirement age, we try to reduce C. Via (1) this reduces the value of the annuity required at retirement and via (3) it increases savings. Both act to reduce Tr. And vice versa. If Tr is drifting below our retirement age target, then our annual consumption budget is too low (i.e. we are sacrificing too much today). The signal given by (1) to (4) is that a rise in C is possible given our retirement date target.

Every quarter I solve (1)-(4) (and variants with different bequest levels (omitted above), Td’s and r’s) for Tr. My wife and I are happy with Tr moving within the range 55-58 (we are in our late forties now, and have careers that we could plausibly continue into our late 60s).
I like it.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Re: Your Retirement Number, or, calculating the funding ratio

Post by Rodc » Mon Jan 09, 2017 5:18 pm

bobcat2 wrote:Hi JamesG,

The funding ratio (FR) is not a forecast. However, there is nothing that prevents a retirement investor from forecasting what the size of their portfolio will be sometime in the future (by whatever method they choose) and calculating the PV of the retirement income liability at that future time to see how they would be doing then via the FR.

What's important in that context is that, if a substantial portion of the portfolio is devoted to stocks, there should not only be a base case forecast for the portfolio, but also high and low forecasts as well. In the low case ask yourself, if this comes to pass, what are my options? The high case is easy, de-risk. :)

BobK
As you suggest a sensitivity analysis is very valuable. Or if only one forecast, use something low but not zombie apocalypse (no one survives the zombie apocalypse!). If you do better you can retire earlier or with a higher income, or leave more to heirs. And you if you need the optimistic assumptions to come true you know you need a different plan - cut spending now to save more, plan to work longer (not always in your control), or some combination. If middle of the road gets you where you want to go you need to know you will need to closely watch progress.

I would also suggest doing the same for income needed. Edwin claimed a desire for $70,000 per year but really has no idea what income he might need in 20 years. He may need $140,000 because he needs a high level of nursing home care. He might not need anything beyond his social security because he is living with his recently divorced daughter to help her raise her kids. Good to have some understanding of how this uncertainty will effect you.

Should look at what if I or wife or both are extremely long lived.

Most of us should run some scenarios - what if wife dies early and I lose her pension (if that is a problem better take the 50% survivor option). What if I end up in a nursing home at 75 and she is living on her own - is there any ok path for that (sell house, rent small apartment)? Etc. You can't look at every scenario, but you can look at some of the more common ones. I watched my mother work this way and I think it has a lot of value.

One problem with all these methods is that in the end, or should I say the beginning, they rest on very ad hoc and error prone assumptions - we do not know our future investing success, we do not know our future income needs, we do not know our future health problems. One can have the most beautiful precise mathematical machinery (funding ratio, fabulously sophisticated Monte Carlo simulations) , but in the end they are all ad hoc and error prone. No one knows the future very well, so no matter how fond one is of their own particular favorite "am I on track" calculation, they are all just ballpark guesses. And woe to the person who does not recognize the high level of uncertainty.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Wildebeest
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Re: Your Retirement Number, or, calculating the funding ratio

Post by Wildebeest » Mon Jan 09, 2017 7:44 pm

Rodc wrote:
bobcat2 wrote:Hi JamesG,

The funding ratio (FR) is not a forecast. However, there is nothing that prevents a retirement investor from forecasting what the size of their portfolio will be sometime in the future (by whatever method they choose) and calculating the PV of the retirement income liability at that future time to see how they would be doing then via the FR.

What's important in that context is that, if a substantial portion of the portfolio is devoted to stocks, there should not only be a base case forecast for the portfolio, but also high and low forecasts as well. In the low case ask yourself, if this comes to pass, what are my options? The high case is easy, de-risk. :)

BobK
As you suggest a sensitivity analysis is very valuable. Or if only one forecast, use something low but not zombie apocalypse (no one survives the zombie apocalypse!). If you do better you can retire earlier or with a higher income, or leave more to heirs. And you if you need the optimistic assumptions to come true you know you need a different plan - cut spending now to save more, plan to work longer (not always in your control), or some combination. If middle of the road gets you where you want to go you need to know you will need to closely watch progress.

I would also suggest doing the same for income needed. Edwin claimed a desire for $70,000 per year but really has no idea what income he might need in 20 years. He may need $140,000 because he needs a high level of nursing home care. He might not need anything beyond his social security because he is living with his recently divorced daughter to help her raise her kids. Good to have some understanding of how this uncertainty will effect you.

Should look at what if I or wife or both are extremely long lived.

Most of us should run some scenarios - what if wife dies early and I lose her pension (if that is a problem better take the 50% survivor option). What if I end up in a nursing home at 75 and she is living on her own - is there any ok path for that (sell house, rent small apartment)? Etc. You can't look at every scenario, but you can look at some of the more common ones. I watched my mother work this way and I think it has a lot of value.

One problem with all these methods is that in the end, or should I say the beginning, they rest on very ad hoc and error prone assumptions - we do not know our future investing success, we do not know our future income needs, we do not know our future health problems. One can have the most beautiful precise mathematical machinery (funding ratio, fabulously sophisticated Monte Carlo simulations) , but in the end they are all ad hoc and error prone. No one knows the future very well, so no matter how fond one is of their own particular favorite "am I on track" calculation, they are all just ballpark guesses. And woe to the person who does not recognize the high level of uncertainty.
Excellent points.

Nobody knows what tomorrow will bring, let alone next year. Any predictions what the stock market will do or if we are still alive in 20 years and what are needs would, are a crap shoot.

That is why a funding ratio sets up a baseline which in my opinion gives you the most secure income, whatever life will throw at you.
The Golden Rule: One should treat others as one would like others to treat oneself.

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Re: Your Retirement Number, or, calculating the funding ratio

Post by Rodc » Mon Jan 09, 2017 7:59 pm

Wildebeest wrote:
Rodc wrote:
bobcat2 wrote:Hi JamesG,

The funding ratio (FR) is not a forecast. However, there is nothing that prevents a retirement investor from forecasting what the size of their portfolio will be sometime in the future (by whatever method they choose) and calculating the PV of the retirement income liability at that future time to see how they would be doing then via the FR.

What's important in that context is that, if a substantial portion of the portfolio is devoted to stocks, there should not only be a base case forecast for the portfolio, but also high and low forecasts as well. In the low case ask yourself, if this comes to pass, what are my options? The high case is easy, de-risk. :)

BobK
As you suggest a sensitivity analysis is very valuable. Or if only one forecast, use something low but not zombie apocalypse (no one survives the zombie apocalypse!). If you do better you can retire earlier or with a higher income, or leave more to heirs. And you if you need the optimistic assumptions to come true you know you need a different plan - cut spending now to save more, plan to work longer (not always in your control), or some combination. If middle of the road gets you where you want to go you need to know you will need to closely watch progress.

I would also suggest doing the same for income needed. Edwin claimed a desire for $70,000 per year but really has no idea what income he might need in 20 years. He may need $140,000 because he needs a high level of nursing home care. He might not need anything beyond his social security because he is living with his recently divorced daughter to help her raise her kids. Good to have some understanding of how this uncertainty will effect you.

Should look at what if I or wife or both are extremely long lived.

Most of us should run some scenarios - what if wife dies early and I lose her pension (if that is a problem better take the 50% survivor option). What if I end up in a nursing home at 75 and she is living on her own - is there any ok path for that (sell house, rent small apartment)? Etc. You can't look at every scenario, but you can look at some of the more common ones. I watched my mother work this way and I think it has a lot of value.

One problem with all these methods is that in the end, or should I say the beginning, they rest on very ad hoc and error prone assumptions - we do not know our future investing success, we do not know our future income needs, we do not know our future health problems. One can have the most beautiful precise mathematical machinery (funding ratio, fabulously sophisticated Monte Carlo simulations) , but in the end they are all ad hoc and error prone. No one knows the future very well, so no matter how fond one is of their own particular favorite "am I on track" calculation, they are all just ballpark guesses. And woe to the person who does not recognize the high level of uncertainty.
Excellent points.

Nobody knows what tomorrow will bring, let alone next year. Any predictions what the stock market will do or if we are still alive in 20 years and what are needs would, are a crap shoot.

That is why a funding ratio sets up a baseline which in my opinion gives you the most secure income, whatever life will throw at you.
I am guessing you did not quite mean that as written. Funding ratio does not provide an income. It is not an investment.

It does model a TIPS-like ladder (assuming one could buy TIPS with the same yield for each rung), and if one really wanted certainty in income, over N years, one could certainly build an actual TIPS ladder. They would have to settle for a very low rate of return. And if they live longer than the ladder they are in trouble. Or if they end up needing more income. No free lunch.

Of course they might only use SS + TIPS ladder for their most basic expenses and keep the rest in stocks and bonds. That said you might consider you have less longevity risk to use SS + annuity even if it is a nominal annuity instead of real. But then you would not need the funding ratio approximation - just price an annuity.

If in the future more real annuities are available funding ratio might also provide a fair approximation useful for planning purposes. We'll have to wait and see. I would like to see such things more widely available. Of course again better would be to just price the annuity you want - no need for approximations.

If one holds stocks and bonds, the use of a TIPS-like ladder model presents a mismatch so introduces some uncertainty.

FWIW: the funding ratio has value. I added it to my other methods in my "how am I doing" sheet. People should be aware of its short comings and limitations just like any other method. I have often pointed out problems with the so called 4% estimate. I have often pointed out the problems with Monte Carlo simulation. I have often pointed out problems with historical analysis. The best one can do is take a broad look using various methods, understand the limitations, understand we simply do not have much certainty and try to make plans that are flexible. All of life is like that after all.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Re: Your Retirement Number, or, calculating the funding ratio

Post by Wildebeest » Mon Jan 09, 2017 9:03 pm

Rodc wrote:
Wildebeest wrote: Excellent points.

Nobody knows what tomorrow will bring, let alone next year. Any predictions what the stock market will do or if we are still alive in 20 years and what are needs would, are a crap shoot.

That is why a funding ratio sets up a baseline which in my opinion gives you the most secure income, whatever life will throw at you.
I am guessing you did not quite mean that as written. Funding ratio does not provide an income. It is not an investment.

It does model a TIPS-like ladder (assuming one could buy TIPS with the same yield for each rung), and if one really wanted certainty in income, over N years, one could certainly build an actual TIPS ladder. They would have to settle for a very low rate of return. And if they live longer than the ladder they are in trouble. Or if they end up needing more income. No free lunch.

If in the future more real annuities are available it might also provide a fair approximation useful for planning purposes. We'll have to wait and see. I would like to see such things more widely available.

If one holds stocks and bonds, the use of a TIPS-like ladder model presents a mismatch so introduces some uncertainty.
I agree that a funding ratio is not the way to a profitable investment portfolio and it's saving grace that it does ensure income. A TIPS ladder would work. A SPIA would work. Social security would work as long as you can live at or below your SSI income. A pension is great especially if it is COLA'd.

What is great about the funding ratio is that SSI, pension, SPIA etc are accounted for and the bond market and stock market down turns which may devastate retirees, are taken out of the equation.


I would go definitely go for a tontine; viewtopic.php?t=139401#p2061288
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Re: Your Retirement Number, or, calculating the funding ratio

Post by Rodc » Tue Jan 10, 2017 6:18 am

Wildebeest wrote:
Rodc wrote:
Wildebeest wrote: Excellent points.

Nobody knows what tomorrow will bring, let alone next year. Any predictions what the stock market will do or if we are still alive in 20 years and what are needs would, are a crap shoot.

That is why a funding ratio sets up a baseline which in my opinion gives you the most secure income, whatever life will throw at you.
I am guessing you did not quite mean that as written. Funding ratio does not provide an income. It is not an investment.

It does model a TIPS-like ladder (assuming one could buy TIPS with the same yield for each rung), and if one really wanted certainty in income, over N years, one could certainly build an actual TIPS ladder. They would have to settle for a very low rate of return. And if they live longer than the ladder they are in trouble. Or if they end up needing more income. No free lunch.

If in the future more real annuities are available it might also provide a fair approximation useful for planning purposes. We'll have to wait and see. I would like to see such things more widely available.

If one holds stocks and bonds, the use of a TIPS-like ladder model presents a mismatch so introduces some uncertainty.
I agree that a funding ratio is not the way to a profitable investment portfolio and it's saving grace that it does ensure income. A TIPS ladder would work. A SPIA would work. Social security would work as long as you can live at or below your SSI income. A pension is great especially if it is COLA'd.

What is great about the funding ratio is that SSI, pension, SPIA etc are accounted for and the bond market and stock market down turns which may devastate retirees, are taken out of the equation.


I would go definitely go for a tontine; viewtopic.php?t=139401#p2061288
Since a funding ratio is a unitless number, how does it provide, much less ensure, an income?

If one is actually invested in bonds and stocks is it a good thing that funding ratio does not account for possible down turns?
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Re: Your Retirement Number, or, calculating the funding ratio

Post by ubermax » Tue Jan 10, 2017 2:55 pm

JamesG wrote:
(1) V = C ((1-(1+r)^-(Td-Tr))/r) (future value of annuity at retirement)
(2) W= A0(1+r)^(Tr-Tn) (future value of current assets)
(3) X=(Y-C)(((1+r)^(Tr-Tn)-1)/r) (future value of savings)
(4) V = W + X
I'm looking at those expressions and I'm thinking they tell the same story that the Bobcat told but from a future value standpoint rather than as of the present ; (1) is a fixed annuity , (2) collapses to A0 and (3) collapses to 0 - and so when current assets equals the fixed annuity the Funding Ratio is 1.00 , the benchmark of progress to your goal is right there .

Also , you haven't shared much about your family , i.e. is it reasonable to assume C will stay fixed and be sufficient going forward ? maybe so ! are Social Security and any expected pension benefits just gravy ??

As someone else commented , things happen in life to push you off track but to me that's a "doom and gloom" state of mind ; you and your wife are young and I commend you for mapping out a plan and making early retirement a goal !!

Good Luck !! :sharebeer

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Re: Your Retirement Number, or, calculating the funding ratio

Post by itstoomuch » Tue Jan 10, 2017 3:13 pm

ubermax wrote:
JamesG wrote:
(1) V = C ((1-(1+r)^-(Td-Tr))/r) (future value of annuity at retirement)
(2) W= A0(1+r)^(Tr-Tn) (future value of current assets)
(3) X=(Y-C)(((1+r)^(Tr-Tn)-1)/r) (future value of savings)
(4) V = W + X
I'm looking at those expressions and I'm thinking they tell the same story that the Bobcat told but from a future value standpoint rather than as of the present ; (1) is a fixed annuity , (2) collapses to A0 and (3) collapses to 0 - and so when current assets equals the fixed annuity the Funding Ratio is 1.00 , the benchmark of progress to your goal is right there .

Also , you haven't shared much about your family , i.e. is it reasonable to assume C will stay fixed and be sufficient going forward ? maybe so ! are Social Security and any expected pension benefits just gravy ??

As someone else commented , things happen in life to push you off track but to me that's a "doom and gloom" state of mind ; you and your wife are young and I commend you for mapping out a plan and making early retirement a goal !!

Good Luck !! :sharebeer
(1) is a fixed annuity
Does not need to be a fixed annuity. A Deferred GLWB with Income gurarantee, either in Fixed-Index or Variable works too. CDs, Bonds held to near maturity, Certain option plays, Whole Life Insurance, and Longevity annuities, pensions.

YchoiceMV
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

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Re: Your Retirement Number, or, calculating the funding ratio

Post by ubermax » Tue Jan 10, 2017 3:24 pm

itstoomuch wrote: Does not need to be a fixed annuity. A Deferred GLWB with Income gurarantee, either in Fixed-Index or Variable works too. CDs, Bonds held to near maturity, Certain option plays, Whole Life Insurance, and Longevity annuities, pensions.
It can be anything the author wants it to be but it sure looks like a fixed annuity based on the information and formulas given

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Re: Your Retirement Number, or, calculating the funding ratio

Post by JamesG » Wed Jan 11, 2017 1:54 am

bobcat2 wrote:Hi JamesG,

The funding ratio (FR) is not a forecast. However, there is nothing that prevents a retirement investor from forecasting what the size of their portfolio will be sometime in the future (by whatever method they choose) and calculating the PV of the retirement income liability at that future time to see how they would be doing then via the FR.

What's important in that context is that, if a substantial portion of the portfolio is devoted to stocks, there should not only be a base case forecast for the portfolio, but also high and low forecasts as well. In the low case ask yourself, if this comes to pass, what are my options? The high case is easy, de-risk. :)

BobK
Hi BobK

Yes, indeed perhaps one of the benefits of calculating the future funding ratio (as at desired retirement age) is that it might provide a useful de-risking guide for savers who are many years (or decades) out from retirement?

In our retirement plans, we notionally split our portfolio into a flooring and risk portfolio. We increase the floor portfolio (entirely invested in Vanguard’s inflation protected government bond fund) each year to keep it on a smooth growth path to hit the value of a joint life annuity at age 65 (calculated by calling my super fund each year to find the current cost of such, not via equation 1 above) that pays our target floor income. The risk portfolio is currently about 75/25 risky/safe, but we adjust allocations from time-to-time to stay on a pre-set path to put the risk portfolio at 60/40 by age 65. If this all sounds a bit familiar, this is because it represents the practical expression of what I have learned from reading your many excellent posts on flooring and the need for the flooring portfolio to be safe and inflation protected.

While I am pretty happy with the above for the moment, one thing that troubles me from time-to-time (particularly when I browse the regular “how do you know if you have won the game?” posts) is how to construct a useful indicator of when some de-risking is possible for a saver many years or decades from retirement. Perhaps the forecast funding ratio (at desired retirement age) could help do that? When it drifts above 1, rather than increase C or decrease target retirement age, one might instead move the forecast funding ratio back towards 1 by raising the portfolio’s safe asset share (thus lowering the weighted average return on the portfolio over the remaining path to planned retirement age).

Cheers,
JamesG
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Re: Your Retirement Number, or, calculating the funding ratio

Post by JamesG » Wed Jan 11, 2017 2:17 am

ubermax wrote:
JamesG wrote:
(1) V = C ((1-(1+r)^-(Td-Tr))/r) (future value of annuity at retirement)
(2) W= A0(1+r)^(Tr-Tn) (future value of current assets)
(3) X=(Y-C)(((1+r)^(Tr-Tn)-1)/r) (future value of savings)
(4) V = W + X
I'm looking at those expressions and I'm thinking they tell the same story that the Bobcat told but from a future value standpoint rather than as of the present ; (1) is a fixed annuity , (2) collapses to A0 and (3) collapses to 0 - and so when current assets equals the fixed annuity the Funding Ratio is 1.00 , the benchmark of progress to your goal is right there .

Also , you haven't shared much about your family , i.e. is it reasonable to assume C will stay fixed and be sufficient going forward ? maybe so ! are Social Security and any expected pension benefits just gravy ??

As someone else commented , things happen in life to push you off track but to me that's a "doom and gloom" state of mind ; you and your wife are young and I commend you for mapping out a plan and making early retirement a goal !!

Good Luck !! :sharebeer
Hi Ubermax,

Thank you for your feedback.

I think you are right: one could add to the above:

(5) FFR = (W+X) / V

where FFR is the future funding ratio. As I noted in my reply to BoBK,I plan to experiment with calculating FFR, and giving r (fixed above, but in reality, a function of the portfolio's future asset allocation shares and distribution across vehicles with different tax statuses) a time dimension that is sensitive to the forecast path of the portfolio's safe/risky asset allocations.

At our current stage of life, I see equations like (1)-(4) and a number of more detailed variants of this that I use, as largely having value in ensuring that we are broadly on track to hit our retirement goals while providing plenty of wriggle room (by targetting an early retirment age) if unanticipated health, redundancy or expense events occur (the doom and gloom events you refer to!). We have income protection, disability and life insurance. But we can only make allowance for unanticipated expenses and technological redundancy by aiming for an early retirement age (even if our plan is to continue working well into our sixties).

Regarding the fixity of C, I basically agree that it is difficult to know its future value. But holding it fixed in the above equations does have some merit. It represents the standard of living in real terms that our family is currently used to, and so a reasonable starting point for retirement planning is that we should aim to maintain this through retirement.

Regarding SS, I live Down Under, so alas its only our superannuation and private savings that will be financing our retirements!

Cheers,
JamesG
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Re: Your Retirement Number, or, calculating the funding ratio

Post by JamesG » Wed Jan 11, 2017 2:27 am

ubermax wrote:
itstoomuch wrote: Does not need to be a fixed annuity. A Deferred GLWB with Income gurarantee, either in Fixed-Index or Variable works too. CDs, Bonds held to near maturity, Certain option plays, Whole Life Insurance, and Longevity annuities, pensions.
It can be anything the author wants it to be but it sure looks like a fixed annuity based on the information and formulas given
Hi Ubermax and Itstoomuch,

Our current plan is not to purchase an annuity at retirement, but to ensure that we will be in a position to do so if we desire. In my more detailed retirement calculations, I do not use equation 1 to value an annuity, but rather, I call my superannuation fund and ask them the approximate cost of an inflation adjusted joint life annuity at age 65. After a short discussion, they realise that I am not kidding them and that I really do want to know the answer to this, even though I am 48 (it seems they do not get many (or any) calls of this kind!) Anyhow, that value then enters a calculation for where the flooring component (invested in inflation protected bonds) of our portfolio should be today to keep us on track to be in a position to purchase an annuity at age 65 should we so desire at that age.

Cheers,
JamesG
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Re: Your Retirement Number, or, calculating the funding ratio

Post by Wildebeest » Thu Jan 12, 2017 10:22 pm

Rodc wrote:
Wildebeest wrote:
Rodc wrote:
Wildebeest wrote: Excellent points.

Nobody knows what tomorrow will bring, let alone next year. Any predictions what the stock market will do or if we are still alive in 20 years and what are needs would, are a crap shoot.

That is why a funding ratio sets up a baseline which in my opinion gives you the most secure income, whatever life will throw at you.
I am guessing you did not quite mean that as written. Funding ratio does not provide an income. It is not an investment.

It does model a TIPS-like ladder (assuming one could buy TIPS with the same yield for each rung), and if one really wanted certainty in income, over N years, one could certainly build an actual TIPS ladder. They would have to settle for a very low rate of return. And if they live longer than the ladder they are in trouble. Or if they end up needing more income. No free lunch.

If in the future more real annuities are available it might also provide a fair approximation useful for planning purposes. We'll have to wait and see. I would like to see such things more widely available.

If one holds stocks and bonds, the use of a TIPS-like ladder model presents a mismatch so introduces some uncertainty.
I agree that a funding ratio is not the way to a profitable investment portfolio and it's saving grace that it does ensure income. A TIPS ladder would work. A SPIA would work. Social security would work as long as you can live at or below your SSI income. A pension is great especially if it is COLA'd.

What is great about the funding ratio is that SSI, pension, SPIA etc are accounted for and the bond market and stock market down turns which may devastate retirees, are taken out of the equation.


I would go definitely go for a tontine; viewtopic.php?t=139401#p2061288
Since a funding ratio is a unitless number, how does it provide, much less ensure, an income?

If one is actually invested in bonds and stocks is it a good thing that funding ratio does not account for possible down turns?
I take it that RodC meant this to be teaching moment. I hope I can rise to the occasion:


Definition of your personal funding ratio – The funding ratio* is the ratio of your assets to your liabilities. Funding ratios indicate whether you can cover all obligated payments to meet liabilities. Ratios below one reflect that you may be in jeopardy of being unable to make obligated payments at a later time.


4 % sustainable withdrawal ratio versus funding ratio of 1.0 . What can go wrong when the s**t hits the fan?

Say you need $80,000 a year and you have not paid into Social security or you do not believe Social Security is around when you need it and you have a nest egg of $ 2,000,000 and you believe you should play it safe and you have 50 % in stock and 50 % in bonds. You are ready to retire after you ran firecalc, financial engines, etc and you pulled the trigger.


What we all worry about and then your worst fear happens and it is 2008, 2009 all over again, and the stock market drops 50% and the interest rate goes up, which may mean that bond portfolio took a 30 % hit. You are still counting on $ 80,000 SWR but your number just shrank to 1,300,000 and would support $ 52,000 SWR and what will the future bring?

A funding ratio would get you where need to be to secure $80,000 dollars what ever the stock and bond market does ( unfortunately it may mean you have to work for more years). Not sexy and it will not make you rich because you loose out on the upside on investing in stocks and bonds.

Do I feel bad for the peeps who put their hopes that life will go their way and have expectations regarding the stock market, interest rate etc, and then the floor drops out?

Who cares how I feel? I do and I would hate a doomsday scenario. What is important that such a scenario may be in our future and investors should be educated and may have the wits to understand the intricacies of statistics, random walk and risk.

The good news it that most Bogleheads have the wits.
The Golden Rule: One should treat others as one would like others to treat oneself.

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Re: Your Retirement Number, or, calculating the funding ratio

Post by Rodc » Fri Jan 13, 2017 6:41 am

Wildebeest wrote:
Rodc wrote:
Wildebeest wrote:
Rodc wrote:
Wildebeest wrote: Excellent points.

Nobody knows what tomorrow will bring, let alone next year. Any predictions what the stock market will do or if we are still alive in 20 years and what are needs would, are a crap shoot.

That is why a funding ratio sets up a baseline which in my opinion gives you the most secure income, whatever life will throw at you.
I am guessing you did not quite mean that as written. Funding ratio does not provide an income. It is not an investment.

It does model a TIPS-like ladder (assuming one could buy TIPS with the same yield for each rung), and if one really wanted certainty in income, over N years, one could certainly build an actual TIPS ladder. They would have to settle for a very low rate of return. And if they live longer than the ladder they are in trouble. Or if they end up needing more income. No free lunch.

If in the future more real annuities are available it might also provide a fair approximation useful for planning purposes. We'll have to wait and see. I would like to see such things more widely available.

If one holds stocks and bonds, the use of a TIPS-like ladder model presents a mismatch so introduces some uncertainty.
I agree that a funding ratio is not the way to a profitable investment portfolio and it's saving grace that it does ensure income. A TIPS ladder would work. A SPIA would work. Social security would work as long as you can live at or below your SSI income. A pension is great especially if it is COLA'd.

What is great about the funding ratio is that SSI, pension, SPIA etc are accounted for and the bond market and stock market down turns which may devastate retirees, are taken out of the equation.


I would go definitely go for a tontine; viewtopic.php?t=139401#p2061288
Since a funding ratio is a unitless number, how does it provide, much less ensure, an income?

If one is actually invested in bonds and stocks is it a good thing that funding ratio does not account for possible down turns?
I take it that RodC meant this to be teaching moment. I hope I can rise to the occasion:


Definition of your personal funding ratio – The funding ratio* is the ratio of your assets to your liabilities. Funding ratios indicate whether you can cover all obligated payments to meet liabilities. Ratios below one reflect that you may be in jeopardy of being unable to make obligated payments at a later time.

Rod: if and only if you invest everything you have in bonds or other investments returning a guaranteed 1% real (1% was used in this thread, someone might choose a different discount rate). And only if your assumptions (what income you will really need 20 years from now, you will not be forced into early retirement, you do not live longer than expected, inflation does not flare, etc) turn out to be accurate or conservative. Those are huge assumptions.

I actually have come around to liking the funding ratio as one tool in my tool box for making "back of the envelop" estimates of what sort of income I might sustain in retirement. But given the uncertainty in stocks and bonds and inflation and life span, and perhaps as much as anything income needs decades down the road (long term nursing home vs living on my own in a nice little apartment), the funding ratio like every other method is subject to being wildly wrong. That is not a complaint about the funding ratio: it is merely reality for all estimates. So I think people have to careful about over promising what this or any method can provide. I would further note that at least Monte Carlo simulations, with all their warts, give you a range of outcomes whereas funding ratio sums everything up into one single number - that is a knock on funding ratio. One can of course try a range of inputs if they wish and I suggest they should.

My point though is that you keep saying it provides an income. Funding ratio is a number, it is not a stock, bond, annuity, it is not real estate. Funding ratio tries to tell you how your future potential liabilities match potential future income - it does not provide the income - you need actual investments for that.

4 % sustainable withdrawal ratio versus funding ratio of 1.0 . What can go wrong when the s**t hits the fan?

Say you need $80,000 a year and you have not paid into Social security or you do not believe Social Security is around when you need it and you have a nest egg of $ 2,000,000 and you believe you should play it safe and you have 50 % in stock and 50 % in bonds. You are ready to retire after you ran firecalc, financial engines, etc and you pulled the trigger.


What we all worry about and then your worst fear happens and it is 2008, 2009 all over again, and the stock market drops 50% and the interest rate goes up, which may mean that bond portfolio took a 30 % hit. You are still counting on $ 80,000 SWR but your number just shrank to 1,300,000 and would support $ 52,000 SWR and what will the future bring?

A funding ratio would get you where need to be to secure $80,000 dollars what ever the stock and bond market does ( unfortunately it may mean you have to work for more years). Not sexy and it will not make you rich because you loose out on the upside on investing in stocks and bonds.

Do I feel bad for the peeps who put their hopes that life will go their way and have expectations regarding the stock market, interest rate etc, and then the floor drops out?

Who cares how I feel? I do and I would hate a doomsday scenario. What is important that such a scenario may be in our future and investors should be educated and may have the wits to understand the intricacies of statistics, random walk and risk.

The good news it that most Bogleheads have the wits.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Monitoring Your Retirement Goal – the Funded Ratio

Post by bobcat2 » Sun Jan 15, 2017 10:12 am

A much revised version of the original post in this thread is now available at the Bogleheads Blog. Barry Barnitz maintains the BH Blog on his personal blog at Financial Page.

Here is a link to the revised version - Monitoring Your Retirement Goal – the Funded Ratio
https://blbarnitz4.wordpress.com/2017/0 ... ded-ratio/

The revised version includes links for further reading on the funded ratio and safe discount rates, plus links to tutorials on understanding time value of money concepts & problems, and spreadsheets for calculating the funded ratio in some circumstances.

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.

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Re: Your Retirement Number, or, calculating the funding ratio

Post by LadyGeek » Sun Jan 15, 2017 11:17 am

FYI - I'm an administrator on Barry Barnitz's blog and have made a few formatting updates.

See: Monitoring Your Retirement Goal – the Funded Ratio | Financial Page

Also note that the spreadsheet in "Time Value of Money and Funded Ratio – tutorials and spreadsheets" was developed by forum member cametomysenses.

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Re: Your Retirement Number, or, calculating the funding ratio

Post by Wildebeest » Sun Jan 15, 2017 9:20 pm

bobcat2 's article on calculating the funding ratio on the Barry Barnitz' blog is great.

I typically check multiple blogs during the week and this is a great reminder to to put the Barry Barnitz' blog on top.
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Using the funded ratio to drive retirement investment strategy

Post by bobcat2 » Wed Jan 18, 2017 10:25 am

Goal Based Investing focused on what matters most: Income

Investments

Code: Select all

Planning Process                      Conventional Retirement               Goal-Based Retirement                                      		            
                                                                      
Investment Goal                      Wealth accumulation                    Retirement Income
                                     (No specified wealth Goal)             (Specified desired income goal)

Risk Measure                         Volatility of portfolio returns        Volatility of funded ratio(FR)  

Success Measure                      Account balance size                   FR relative to income goal

Asset allocation strategy            Generic Fixed or age-only              Dynamic based on age,income & FR-focused                                                                              on improving FR                 
The above table is a reproduction of a slide on page 6 in Robert Merton’s presentation on retirement planning to the MIT Sloan School Reunion in the summer of 2015.
Link to presentation -
http://mitsloan.mit.edu/uploadedFiles/A ... %20PPT.pdf

Seen this way the funded ratio can be used to drive the retirement investment strategy. Consider the following approach.

Several years prior to retirement you have a retirement income goal for your portfolio to meet. You want the asset allocation of your portfolio to be the allocation that produces the highest probability of achieving a funded ratio of 0.95 or greater at retirement. Run Monte Carlo simulations on several different stock/bond allocations from now to your retirement year. Perhaps all 15 on the grid of 5% changes from 90/10 to 10/90 stocks/bonds. From these 15 simulations pick the asset allocation that produces the highest percentage of funded ratios of 0.95 or greater at retirement. Redo this process at least once every six months and reset the AA, if the optimal AA has shifted.

The above assumes at least one of the simulations meets your hurdle rate funded ratio of 0.95 or greater probability, e.g. 90%. If not more dramatic action is required such as saving more per year, retiring later, annuitizing more, using home equity for retirement income, or reducing your planned retirement spending.

Obviously this can’t be done by most individual investors, even Bogleheads. :wink: It could be done by financial advisors that actually earn their keep.

BobK
Last edited by bobcat2 on Mon Jan 23, 2017 8:23 pm, edited 2 times in total.
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MEA CULPA

Post by bobcat2 » Sat Jan 21, 2017 10:04 am

I offer a mea culpa for how I have priced the income liability of the funded ratio for individuals. I now believe the better way to price the retirement income liability in the denominator of the funded ratio (FR) is to use the price of a real life annuity. If you are at retirement or in retirement, price an immediate real life annuity. If you are calculating the FR before retirement, it is the price of a deferred real life annuity purchased at your current age that begins payouts at your targeted retirement age. Each year you will need to reprice the liability because the price of the delayed life annuity is affected by changes in interest rates, inflation, and life expectancy, as well as the delay being one year shorter.

If you want to include a nominal pension or Social Security (SS) in the FR then for a nominal pension price a deferred nominal life annuity beginning at the age you intend to begin the pension. For SS use either the income stream or price a real life annuity at the age you intend the SS benefits to begin.

BTW when receiving the annuity quotes it appears that currently a real life annuity costs roughly the same as a life annuity with a set 3% per year increase for men. For women with their longer longevity, it’s slightly higher than the 3% graded. This makes sense because expected inflation is now in the 2% - 2.2% range. The price of a real life annuity compared to a graded annuity should be somewhat higher than expected inflation, because the real annuity has to pay out, even if inflation should turn out to be much higher than expected over the next 20-30 years.

By using annuity pricing the arbitrariness of setting a safe, but estimated unobserved, discount rate is replaced with the current market price of safe retirement income protected against both inflation and longevity. Thus it also does away with estimating one’s own life expectancy.

The inputs to the funded rate are simply the following –

Determined by participant
* Retirement income goal
* Retirement start year

Market determined
* Current value of portfolio
* Price of real life annuity

The funded ratio (FR) becomes simply
FR = assets/price of real life annuity

Case 1.
Harry is 53 years old and plans to retire in 12 years at age 65. Harry has a portfolio worth $600,000. He wants that portfolio that generates $44,000 per year. The cost of a deferred real life annuity that produces $44,000 per year beginning in 12 years at age 65 is approximately $598,000. The funded ratio is almost exactly 1.0.

FR = 600,000/598,000 = 1.003

Case 2.
Frieda is 71 years and has been retired for six years. She has a Social Security benefit of $22,000 and would like her portfolio to produce an additional $26,000 per year for life. Her portfolio is currently worth $585,000. What is the funded ratio for her portfolio?

An immediate real life annuity that produces $26,000 per year costs approximately $542,000.

FR = assets/price of real life annuity = 585,000/542,000 = 1.08

Tip of the hit to some guy called Merton for thinking of it this way. :wink:

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Re: MEA CULPA

Post by alec » Sat Jan 21, 2017 6:49 pm

bobcat2 wrote:
Case 1.
Harry is 53 years old and plans to retire in 12 years at age 65. Harry has a portfolio worth $600,000. He wants that portfolio that generates $44,000 per year. The cost of a deferred real life annuity that produces $44,000 per year beginning in 12 years at age 65 is approximately $598,000. The funded ratio is almost exactly 1.0.

FR = 600,000/598,000 = 1.003

Case 2.
Frieda is 71 years and has been retired for six years. She has a Social Security benefit of $22,000 and would like her portfolio to produce an additional $26,000 per year for life. Her portfolio is currently worth $585,000. What is the funded ratio for her portfolio?

An immediate real life annuity that produces $26,000 per year costs approximately $542,000.

FR = assets/price of real life annuity = 585,000/542,000 = 1.08
Thought I'd highlight two, IMO, very important words - deferred and immediate.

Bob, how should one go about getting the present (i.e. today's) value of a real life annuity starting in the future? Should one:

1. Get a quote today for the real life annuity starting at the future age.
2. Discount that number to today using a real interest rate.

Thanks,
Alecc
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Re: MEA CULPA

Post by bobcat2 » Sat Jan 21, 2017 7:50 pm

alec wrote:Bob, how should one go about getting the present (i.e. today's) value of a real life annuity starting in the future? Should one:

1. Get a quote today for the real life annuity starting at the future age.
2. Discount that number to today using a real interest rate.

Thanks,
Alec
Hi Alec,

"Get a quote today for the real life annuity starting at the future age," is the correct answer.

This is really an easy and accurate way to calculate the funded ratio. Take the value of the portfolio and divide it by the price of a real life annuity. The life annuity is deferred if you are years before retirement. It is immediate at retirement or in retirement. You don't have to compute a PV using an estimate of the safe discount rate. Also, you don't have to estimate your life expectancy.

You know when you want to retire. You should have a retirement income goal. Get the current value of your portfolio. Then go to the Income Solutions portal through Vanguard and get the quote for the price of a real annuity that matches your income goal. For the Harry example done late Thursday, it took less than 5 minutes from the time I logged onto Vanguard to get the quote.

I got this from carefully rereading Merton's presentation at the Sloan school reunion. I noticed how many of the 20 slides had 'funded ratio' on them. The following is from slide 7.
Funded ratio is equal to the amount of retirement income the current accumulation could buy/ target retirement income goal. So if the target replacement income goal is $70,000 and the current accumulation could buy replacement income of $49,000, the funded ratio = 0.70. If funded ratio = 1.00, then the current accumulation can buy replacement income of $70,000 and the member has reached his goal and is fully funded.
Merton presentation link - http://mitsloan.mit.edu/uploadedFiles/A ... %20PPT.pdf

Best,
Bob
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Re: MEA CULPA

Post by alec » Sat Jan 21, 2017 8:31 pm

bobcat2 wrote:
This is really an easy and accurate way to calculate the funded ratio. Take the value of the portfolio and divide it by the price of a real life annuity. The life annuity is deferred if you are years before retirement. It is immediate at retirement or in retirement. You don't have to compute a PV using an estimate of the safe discount rate. Also, you don't have to estimate your life expectancy.

You know when you want to retire. You should have a retirement income goal. Get the current value of your portfolio. Then go to the Income Solutions portal through Vanguard and get the quote for the price of a real annuity that matches your income goal. For the Harry example done late Thursday, it took less than 5 minutes from the time I logged onto Vanguard to get the quote.
Thanks. I went to the Income Solutions website, and saw that it will give you prices of real life annuities starting many years in the future.
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Re: Your Retirement Number, or, calculating the funded ratio

Post by bobcat2 » Sun Jan 22, 2017 10:44 am

alec wrote: I went to the Income Solutions website, and saw that it will give you prices of real life annuities starting many years in the future.
I'll bet that surprised you. I know it surprised me to find that out last week. 8-)

Keep in mind that deferred real life annuities do not account for inflation during the deferral period. If you want $50,000 in today's dollars ten years from now, that income target every year will have to be adjusted by the amount of inflation over the year. If inflation was 2% in the first year, the income target in the 2nd year will be $51,000, not $50,000. Nothing wrong with that, your plan has to account for keeping the target in the nominal equivalent of real dollars in any event.

Every year the price of the real life annuity is affected by
- changes in real interest rates
- inflation
- small changes in life expectancy
- the time to when payouts begin is one year shorter

The longer the deferral period, the longer the duration of the annuity; that means when you are many years from your retirement start date, the price of the annuity is very sensitive to changes in interest rates.

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Re: Your Retirement Number, or, calculating the funding ratio

Post by SGM » Sun Jan 22, 2017 10:58 am

Hi Bob,
Thanks for the update with Merton's revised calculation. It confirms that we are above a ratio of 1.0.

We are planning at some point to annuitize a small part of our portfolio in chunks over a period of time. I like the how an SPIA will be an automatic addition to the checking account along with other income streams. I also think that an annuity is somewhat protected from fraud that might diminish a portfolio as one's mental faculties become less sharp in very old age.

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Re: Your Retirement Number, or, calculating the funding ratio

Post by bobcat2 » Sun Jan 22, 2017 3:28 pm

SGM wrote:Hi Bob,
Thanks for the update with Merton's revised calculation.
Hi Sa*, :wink:

I'm sure this was Merton's original intent, and not a revision on his part. The revision is on my part. The finance professor who in your words, talks like a Brooklyn cabbie, is always ahead of the rest of us. :)

Best,
Bob
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Re: Using the funded ratio to drive retirement investment strategy

Post by itstoomuch » Sun Jan 22, 2017 6:32 pm

bobcat2 wrote:Goal Based Investing focused on what matters most: Income

Investments

Code: Select all

Planning Process                      Conventional Retirement               Goal-Based Retirement                                      		            
                                                                      
Investment Goal                      Wealth accumulation                    Retirement Income
                                     (No specified wealth Goal)             (Specified desired income goal)
[..snip]       
The above table is a reproduction of a slide on page 6 in Robert Merton’s presentation on retirement planning to the MIT Sloan School Reunion in the summer of 2015.
Link to presentation -
http://mitsloan.mit.edu/uploadedFiles/A ... %20PPT.pdf

Seen this way the funded ratio can be used to drive the retirement investment strategy. Consider the following approach.[Italics and bold added by ITM]

Several years prior to retirement you have a retirement income goal for your portfolio to meet. You want the asset allocation of your portfolio to be the allocation that produces the highest probability of achieving a funded ratio of 1.0 or greater at retirement. Run Monte Carlo simulations on several different stock/bond allocations from now to your retirement year. Perhaps all 13 on the grid of 5% changes from 80/20 to 20/80 stocks/bonds. From these 13 simulations pick the asset allocation that produces the highest percentage of funded ratios of 1.0 or greater at retirement. Redo this process at least once every six months and reset the AA, if the optimal AA has shifted.

The above assumes at least one of the simulations meets your hurdle rate funded ratio of 0.96 or greater probability, e.g. 90%. If not more dramatic action is required such as saving more per year, retiring later, annuitizing more, using home equity for retirement income, or reducing your planned retirement spending.

Obviously this can’t be done by most individual investors, even Bogleheads. :wink: It could be done by financial advisors that actually earn their keep.

BobK
We discovered this to be true as we approached a forced early retirement scenario, 2008. {We did not do extensive MonteCarlo simulations for various reasons} If your FR is below 1.0, you would want to get above 1.0 as soon as possible rather than to draw out the process. If you are above 1.0, you will reason that you either have retirement made, or you want to achieve an higher level of comfort. As Bernstein has said, "you can quit the game or do anything you want."
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Re: Your Retirement Number, or, calculating the funding ratio

Post by bobcat2 » Mon Jan 23, 2017 10:05 am

Investors planning for retirement can use annuity pricing to easily calculate an overall funded ratio. Take the example where the investor is expecting a nominal pension and Social Security in addition to retirement income generated by their portfolio. That investor can calculate a funded ratio using annuity pricing to calculate a FR that incorporates all three sources of retirement income.

Obtain the price of a deferred nominal life annuity that produces the same amount of nominal retirement income as the pension. Get the price of a deferred real life annuity that produces the same amount of real retirement income as the SS benefit.

In the numerator of the FR sum the current value of your portfolio, the price of the deferred pension, and the price of the deferred SS benefit. In the denominator put in the cost of a deferred real life annuity that is the price of your retirement income goal. Consider the case of Otto in the following example.

Otto is 56 years old and is planning to retire in nine years at the age of 65. He will be taking his pension and SS at retirement. Otto estimates that his company pension will produce $22,000 in nominal income in retirement. He further estimates that SS will provide $26,000 in real income during retirement. His portfolio is currently worth $570,000. Otto’s retirement income goal is $68,000. What is Otto’s overall retirement funded ratio?

FR = (assets + price of deferred pension + price of deferred SS)/price of deferred income goal

The price of a 9 year deferred nominal life annuity that produces equivalent income to Otto’s pension of $22,000 per year nominal is $237,700. (rounded to the nearest $100)

The price of a 9 year deferred real life annuity that produces equivalent income to Otto’s SS benefit of $26,000 per year real is $393,200. (rounded to the nearest $100)

The price of a 9 year deferred real life annuity that meets Otto’s retirement income goal of $68,000 real is $1,028,300. (rounded to the nearest $100)

FR = (570,000+237,700+393,200)/1,028,300 = 1,200,900/1,028,300 = 1.17

Otto is in good shape to meet his retirement income goal.

BobK
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Re: Your Retirement Number, or, calculating the funding ratio

Post by SGM » Tue Jan 24, 2017 5:53 pm

bobcat2 wrote:
SGM wrote:Hi Bob,
Thanks for the update with Merton's revised calculation.
Hi Sa*, :wink:

I'm sure this was Merton's original intent, and not a revision on his part. The revision is on my part. The finance professor who in your words, talks like a Brooklyn cabbie, is always ahead of the rest of us. :)

Best,
Bob
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Re: Your Retirement Number, or, calculating the funding ratio

Post by bobcat2 » Sun Jan 29, 2017 11:18 pm

In using the funded ratio the step that generates by far the most contention, is how to go about calculating the denominator, the price of the retirement income goal. Here is an article I came across this evening by Moshe Milevsky from a few years ago that concurs that the best way to price the retirement income goal is through a real life annuity.

From the article - What Does Retirement Really Cost?
Here is a fact. If you spend $230,000 on a life annuity from an insurance company, it will generate the desired $1,000 per month income — adjusted by the consumer price index — with no investment or mortality risk. You don’t have to assume how long you will live or assume what your portfolio will earn over the random horizon of retirement.

As such, the annuity price is effectively the cost of your retirement income plans and the only answer to the question posed in the title of this column. Any other answer involves extra risk, possibly invisible to the naked eye. It is often obscured from view thanks to heroic assumptions hardwired into financial calculators. …

In sum, assuming a more aggressive rate of return — or planning to some arbitrary age — and then claiming that retirement has suddenly become “cheaper” is a dangerous fallacy that will end up costing many retirees quite dearly. Ask anyone who assumed a 6.5% investment return over the last decade — or the 100,000 American centenarians — how their retirement is panning out.

More importantly, a life annuity should not be viewed as just another (expensive) way to finance a retirement income or, worse yet, as just one possible tool in a growing arsenal of products. Rather, the annuity price is actually a market signal of what retirement really costs. And, it is the cheapest and safest way to convert a nest egg into a lifetime of secure income. Market prices convey information and the cost of a life annuity is a hard-drive full of intelligence.

Alas, the real dilemma is what fraction of your nest egg you really want to allocate to actual retirement (income)…
Link to article -http://www.thinkadvisor.com/2011/09/01/ ... 720&page=5

While the income liability, the denominator in the funded ratio, should be reported in terms of a real life annuity, that is not a recommendation that all assets targeted for retirement income be annuitized. It is simply taking into account that the objective is to convert all values of the income goal to a common measure of retirement income potential.

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Re: Your Retirement Number, or, calculating the funding ratio

Post by Bogel0048 » Sun Feb 26, 2017 2:03 pm

Duplicate Post - Deleted

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Re: Your Retirement Number, or, calculating the funding ratio

Post by PaulF » Wed Jul 19, 2017 9:15 am

Reviving an older thread to ask about the status of Income Solutions (and explore any alternatives).

When I first tried to calculate my FR following Bob's informative post some months ago, I could find all the annuity quotes I needed from Income Solutions (via VG's site). There was one company (Prudential, IIRC) quoting real life annuities, there were ~4 others quoting nominal. I decided to revisit this calculation, but now I cannot seem to get any quotes from Income Solutions. The results page shows only AIG, but even they list "No Quote" for my requests.

Has anyone else noticed this, or does anyone know of another reliable source of annuity quotes (that does not require giving contact information)?

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Re: Your Retirement Number, or, calculating the funding ratio

Post by itstoomuch » Wed Jul 19, 2017 9:52 am

^yes,
Tells me that rates may be changing.
Try ImmediateAnnuities or like.
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Re: Your Retirement Number, or, calculating the funding ratio

Post by bobcat2 » Wed Jul 19, 2017 9:55 am

PaulF wrote:Reviving an older thread to ask about the status of Income Solutions (and explore any alternatives).

When I first tried to calculate my FR following Bob's informative post some months ago, I could find all the annuity quotes I needed from Income Solutions (via VG's site). There was one company (Prudential, IIRC) quoting real life annuities, there were ~4 others quoting nominal. I decided to revisit this calculation, but now I cannot seem to get any quotes from Income Solutions. The results page shows only AIG, but even they list "No Quote" for my requests.

Has anyone else noticed this, or does anyone know of another reliable source of annuity quotes (that does not require giving contact information)?
See the bottom of the first post in the following linked thread.
Link - viewtopic.php?f=10&t=219878

BobK
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Re: Your Retirement Number, or, calculating the funding ratio

Post by PaulF » Wed Jul 19, 2017 10:10 am

bobcat2 wrote:
PaulF wrote:Reviving an older thread to ask about the status of Income Solutions (and explore any alternatives).

When I first tried to calculate my FR following Bob's informative post some months ago, I could find all the annuity quotes I needed from Income Solutions (via VG's site). There was one company (Prudential, IIRC) quoting real life annuities, there were ~4 others quoting nominal. I decided to revisit this calculation, but now I cannot seem to get any quotes from Income Solutions. The results page shows only AIG, but even they list "No Quote" for my requests.

Has anyone else noticed this, or does anyone know of another reliable source of annuity quotes (that does not require giving contact information)?
See the bottom of the first post in the following linked thread.
Link - viewtopic.php?f=10&t=219878

BobK
Thanks. I had not seen that edit -- I appreciate the response.

At this time, however, I am not willing to give them my contact information, which seems to be necessary to get the quote. Oh well.

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Re: Your Retirement Number, or, calculating the funding ratio

Post by The Wizard » Wed Jul 19, 2017 12:29 pm

I read through this thread, to learn more about the Funding Ratio concept.
I suppose it's ok for some folks, but I didn't use anything like this when i retired four years ago.

I prefer an Income Stream concept.
Put together a spreadsheet projecting your income streams from start of retirement to your early/mid 70s.
For many folks, aim to have the same or more Net Income at start of retirement as in latter working years. Net income means without FICA, 401k contribution, or Roth IRA contribution.
This target income should exceed your "expenses" nicely and allow one to carry on in style in retirement, rather than hunkering down.

How to assemble your income sheet is up to you. If you choose to take only dividend income rather than total return, you'll need more assets.
If you choose to annuitize a portion of your assets for lifetime income, you'll need fewer assets to achieve your target starting income.

Figure ways to increase your retirement income periodically. In my case, I started divorced spouse SS income three years into retirement and will start full SS income seven years in (age70).
I also pay $1000/month presently on my HELOC (refinanced mortgage); when that is paid off before long, I'll have a nice uptick in discretionary retirement income.

I'm glad to see that BobK eliminated the need to estimate years remaining in your life for the Funding Ratio concept. I didn't see this being useful for many Bogleheads, reason being: if I survive 15 years into retirement, my remaining portfolio could easily be $1M.
But if I survive 25 years, it could easily grow to $1.5M or more.
Lots of uncertainty there depending on the details, of course...
Attempted new signature...

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Re: Your Retirement Number, or, calculating the funding ratio

Post by jmk » Wed Jan 03, 2018 12:06 am

bobcat2 wrote:
Mon Dec 19, 2016 1:11 pm
It seems to me that the discount rate should be consistent with the safest real LT rate that matches the duration of the liability. That would a TIPS rate. Since TIPS only go out 30 years the 30 year TIPS rate should be used for liabilities far in the future, i.e. it should be used for young investors far from retirement.
Why would the discount rate always be set at the safest rate matching the duration of the liability? This makes sense for some core liabilities like living expenses and medical; but after that wouldn't we be fine to presume a higher-but-still realistic rate of return, e.g. the highest cagr met in 75% of monte carlo cases run over duration n? In other words, isn't the rational discount rate inversely related to the importance of meeting the liability to us?

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Re: Your Retirement Number, or, calculating the funding ratio

Post by bobcat2 » Thu Jan 04, 2018 6:19 pm

jmk wrote:
Wed Jan 03, 2018 12:06 am
Why would the discount rate always be set at the safest rate matching the duration of the liability?
Because it's an aspirational income goal you actually want to meet. Hoped for income above that (everyone would like to have more) can be on a hit or miss basis, but the income goal you want to meet with relatively high probability should be ascertained by a safe discounting rate, such as the price of a real life annuity for that amount of income.

See this later thread on the funded ratio, particularly the opening post. - viewtopic.php?f=10&t=219878

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Re: Your Retirement Number, or, calculating the funding ratio

Post by cfs » Thu Jan 04, 2018 6:47 pm

Good information.
Thanks Mister BobK for this conversation.
I feel pretty good about my situation.
Thanks for reading ~cfs~
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