Understanding Volatility during Retirement

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Topic Author
othrif
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Understanding Volatility during Retirement

Post by othrif »

I am helping my parents plan and understand their retirement. I have asked in a different thread about using an annuity as an alternative form of ways to supplement their retirement income viewtopic.php?p=7865616.

I would like to focus here on one point that their financial advisor raised (whom I working very hard to have them stop using):

Long Recovery Times Post-Market Drops: Let's pull a picture of the S&P500. If you look at the market drops, it takes years for the market to recover. You cannot afford to keep your money in the stock market if you are withdrawing at retirement. Let's take few examples: In June 2000 the S&P500 was 1480, it took 7 years to recover until May 2007. In September 2007, the S&P500 was 1526, it took 6 years to recover until March 2013.

Image

I feel I am missing something. I have read that the average market recovery from a downturn is around 3 years. However, looking at the figures above shared by the financial advisor I cannot help but agree that indeed it has taken several years for markets to recover in these examples which might scare away retirees relying on their investments to sustain part of their retirement.

The other point I am trying to make but lacking the tool, the figure above is a bit misleading in the sense that this assumes you put all your money at once in the S&P500 at the peak and waiting for it to recover before you withdraw money. Now obviously that is almost never the case. We are also not taking into account dividends reinvestments that happen automatically which will lessen the time window.

What I am after is to show them that if we took a more balanced approach with a 60% stocks / 40% bonds or event 60% bonds / 40% stocks we should arrive at a more balanced portfolio in terms of volatility in times of market downturn to sustain our retirement.

As my parents are looking for proof, I would appreciate pointing me to resources and calculators that will help make the point clear.

To get more info related to this scenario: The current age 61. The portfolio size is $500k, and expected annual expenses at retirement are $72k. Expect Social Security to contribute another $60k per year at age 70

Please let me know if you need more information or specifics to be able to help.


Thank you!
Last edited by othrif on Mon May 13, 2024 10:15 am, edited 1 time in total.
jebmke
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Re: Understanding Volatility during Retirement

Post by jebmke »

You might take a look at Portfolio Visualizer

https://www.portfoliovisualizer.com/backtest-portfolio

Create some sample (simple) portfolios with different asset allocations and use them to "test" their risk tolerance.

It is important to remember that historical data is just that -- historical. There are no "proofs" that ensure that results in the future will be similar.
When you discover that you are riding a dead horse, the best strategy is to dismount.
KlangFool
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Re: Understanding Volatility during Retirement

Post by KlangFool »

OP,

"It depends"

1) What is the portfolio size versus retirement expense? 25X? 40X? 50X?

2) How is the dividend reinvestment matters in retirement when you need to spend the dividend?

3) It only matters when your portfolio is 50X or above. Then, your dividend/interest income is bigger than your annual expense.

4) That is the most relevant question.

5) In summary, the rule of thumb is your fixed income portion of your portfolio should be at least 10 years of expense. Then, you could survive 10 years of down turn. Stock has been known to be down for 10 years without recovery.

6) In retirement/withdrawal, volatility is real risk. You have to withdraw/sell stock even if the stock market is down for your annual expense.

KlangFool
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dbr
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Re: Understanding Volatility during Retirement

Post by dbr »

othrif wrote: Mon May 13, 2024 9:43 am I am helping my parents plan and understand their retirement. I have asked in a different thread about using an annuity as an alternative form of ways to supplement their retirement income viewtopic.php?p=7865616.

I would like to focus here on one point that their financial advisor raised (whom I working very hard to have them stop using):

Long Recovery Times Post-Market Drops: Let's pull a picture of the S&P500. If you look at the market drops, it takes years for the market to recover. You cannot afford to keep your money in the stock market if you are withdrawing at retirement. Let's take few examples: In June 2000 the S&P500 was 1480, it took 7 years to recover until May 2007. In September 2007, the S&P500 was 1526, it took 6 years to recover until March 2013.

Image

I feel I am missing something. I have read that the average market recovery from a downturn is around 3 years. However, looking at the figures above shared by the financial advisor I cannot help but agree that indeed it has taken several years for markets to recover in these examples which might scare away retirees relying on their investments to sustain part of their retirement.

The other point I am trying to make but lacking the tool, the figure above is a bit misleading in the sense that this assumes you put all your money at once in the S&P500 at the peak and waiting for it to recover before you withdraw money. Now obviously that is almost never the case. We are also not taking into account dividends reinvestments that happen automatically which will lessen the time window.

What I am after is to show them that if we took a more balanced approach with a 60% stocks / 40% bonds or event 60% bonds / 40% stocks we should arrive at a more balanced portfolio in terms of volatility in times of market downturn to sustain our retirement.

As my parents are looking for proofs, I would appreciate pointing me to resources and calculators that will help make the point clear.

Please let me know if you need more information or specifics to be able to help.

Thank you!
That is a price chart and does not include dividends. In Portfolio Visualizer you can display a return chart that includes dividends. Actually PV allows you to choose return with dividends reinvested or gain/loss with dividends not reinvested (the word return is defined to include dividends reinvested). You can also set a scenario where contributions and/or withdrawals are made. When the scenario is other than a lump sum at a point with dividends reinvested and no contributions or withdrawals then return is undefined. In that case you can report growth rate (CAGR) and either internal rate of return (IRR) or time weighted rate of return (TWRR).

You can also choose to display nominal dollars or real dollars after inflation.

To make a fair general statement about market recovery you want a return chart with dividends reinvested, no contributions or withdrawals to confuse what is being shown, and probably would want to account for inflation.

PV allows you to study a portfolio including many assets.

Beware that there is no such thing as proofs in this business. Investment returns are constantly varying in some ill defined manner and no period of time repeats any previous period of time. Results have to be posed in statistical terms and viewed with a mind schooled in and accustomed to interpreting such data. PV in particular is weak at not featuring a long time span of data and results vary with time period chosen. On the other hand behavior is not completely stable over time so adding longer time periods also increases uncertainty even as it adds better statistical estimation.
Last edited by dbr on Mon May 13, 2024 10:16 am, edited 1 time in total.
Topic Author
othrif
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Re: Understanding Volatility during Retirement

Post by othrif »

KlangFool wrote: Mon May 13, 2024 9:54 am OP,

"It depends"

1) What is the portfolio size versus retirement expense? 25X? 40X? 50X?

2) How is the dividend reinvestment matters in retirement when you need to spend the dividend?

3) It only matters when your portfolio is 50X or above. Then, your dividend/interest income is bigger than your annual expense.

4) That is the most relevant question.

5) In summary, the rule of thumb is your fixed income portion of your portfolio should be at least 10 years of expense. Then, you could survive 10 years of down turn. Stock has been known to be down for 10 years without recovery.

6) In retirement/withdrawal, volatility is real risk. You have to withdraw/sell stock even if the stock market is down for your annual expense.

KlangFool
To get more info related to this scenario: Current age 61. Portfolio size is $500k, expected annual expenses at retirement are $72k. Expect Social Security to contribute another $60k per year at age 70
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WoodSpinner
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Re: Understanding Volatility during Retirement

Post by WoodSpinner »

OP,

Since you are predicting the future there will never be a Proof!

There are probabilities but no certainty.

Frankly, Retirement Income Planning needs to factor in the Behavioral and Emotional aspects as part of the process.

I suggest having them complete a RISA Profile and work with the advisor to build a plan that aligns with their tendencies. There simply isn’t a single correct approach. In my experience, the plan you can execute in good times and bad is the best solution—even if in hindsight it wasn’t the optimal one.

https://retirementresearcher.com/retire ... -accuracy/

FWIW, I use a Safety First approach for my Retirement Planning and leverage SS, Pensions, Annuities to cover ny Minimum Lifestyle Expenses since it’s the best match for my (and my spouse’s) behavioral makeup. Realistically, I could be successful with other approaches given the size of my portfolio but I wouldn’t be as comfortable.

Hope this helps …

WoodSpinner
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KlangFool
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Re: Understanding Volatility during Retirement

Post by KlangFool »

othrif wrote: Mon May 13, 2024 10:15 am
KlangFool wrote: Mon May 13, 2024 9:54 am OP,

"It depends"

1) What is the portfolio size versus retirement expense? 25X? 40X? 50X?

2) How is the dividend reinvestment matters in retirement when you need to spend the dividend?

3) It only matters when your portfolio is 50X or above. Then, your dividend/interest income is bigger than your annual expense.

4) That is the most relevant question.

5) In summary, the rule of thumb is your fixed income portion of your portfolio should be at least 10 years of expense. Then, you could survive 10 years of down turn. Stock has been known to be down for 10 years without recovery.

6) In retirement/withdrawal, volatility is real risk. You have to withdraw/sell stock even if the stock market is down for your annual expense.

KlangFool
To get more info related to this scenario: Current age 61. Portfolio size is $500k, expected annual expenses at retirement are $72k. Expect Social Security to contribute another $60k per year at age 70
When is the person planning to retire? 65? 67? 70?

KlangFool
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nisiprius
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Re: Understanding Volatility during Retirement

Post by nisiprius »

othrif wrote: Mon May 13, 2024 9:43 am ...I feel I am missing something. I have read that the average market recovery from a downturn is around 3 years. However, looking at the figures above shared by the financial advisor I cannot help but agree that indeed it has taken several years for markets to recover in these examples which might scare away retirees relying on their investments to sustain part of their retirement...
This is a complicated and controversial topic. I honestly feel that the advice commonly given by advisors and in investment books has an optimistic bias. They may be trying to counter excessive pessimism on the part of poorly-informed laypeople. Or, of course, they may simply be right and I may simply be wrong.

I want to point out two things about the "average recovery."

First, it was traditional to talk about the full duration of the downturn. And I believe it is the full duration that matters. You are experiencing a bad impact during the decline, it doesn't wait until the bottom. In the last ten years or so I see more and more references to the time for "recovery." The numbers are probably accurate as far as they go, but the question is whether "time for recovery" is all that matters.

Second, the periods from 1929 through 1945, and from 2000 through 2013, are "interesting." In both cases, you have a decline, then a rise that is either just barely a full recovery or not quite, immediately followed by a second decline. Two long bear markets back-to-back. My favorite reference for scoring these is from Morningstar. Morningstar's data incorporates dividends and is corrected for inflation.

Source

Image

First, the Great Depression. Morningstar scores 1929-1945 as two separate declines, #1 and #5, with only three months separating them. It was a full recovery, but only just barely, and unless you sold your stocks with perfect timing right then, you immediately experienced a second crash. If we only count "recovery" time, we could score this as one 4.5-year recovery and one 7-year recovery, for an "average recovery time" less than six years. But in most respects the impact on an investor would have been close to a single 16-year decline.

Second, the "Lost Decade." This is an interesting one because until Morningstar made its call, I'd always thought of this as two separate events, the dot-com crash and the global financial crisis. But in this case, when corrected for inflation, 2007 did not quite reach the previous peak, so it was not quite scored as a recovery; Morningstar considers it a single decline lasting more than twelve years.

In any case, I believe that 1929-1945 and 2000-2013 were much worse and much longer-lasting than statistics about the "average recovery from a bear market" would indicate.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Topic Author
othrif
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Re: Understanding Volatility during Retirement

Post by othrif »

KlangFool wrote: Mon May 13, 2024 10:17 am
othrif wrote: Mon May 13, 2024 10:15 am
KlangFool wrote: Mon May 13, 2024 9:54 am OP,

"It depends"

1) What is the portfolio size versus retirement expense? 25X? 40X? 50X?

2) How is the dividend reinvestment matters in retirement when you need to spend the dividend?

3) It only matters when your portfolio is 50X or above. Then, your dividend/interest income is bigger than your annual expense.

4) That is the most relevant question.

5) In summary, the rule of thumb is your fixed income portion of your portfolio should be at least 10 years of expense. Then, you could survive 10 years of down turn. Stock has been known to be down for 10 years without recovery.

6) In retirement/withdrawal, volatility is real risk. You have to withdraw/sell stock even if the stock market is down for your annual expense.

KlangFool
To get more info related to this scenario: Current age 61. Portfolio size is $500k, expected annual expenses at retirement are $72k. Expect Social Security to contribute another $60k per year at age 70
When is the person planning to retire? 65? 67? 70?

KlangFool
Current plan is age 70 if they can afford it.
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PaddyMac
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Re: Understanding Volatility during Retirement

Post by PaddyMac »

Have you read any of Morningstar's articles on Bucketing by Christine Benz? This is the idea that you have 1-2 years of cash-like investments to live off of, then a few more years (say 3-7) available in Bonds or conservative investments, then the rest in more riskier stocks. The idea of buckets is to feel okay about down markets in retirements as there is no need to sell equities when they are down as you can spend the first two buckets first and wait out the downturn.
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Re: Understanding Volatility during Retirement

Post by KlangFool »

othrif wrote: Mon May 13, 2024 4:11 pm
KlangFool wrote: Mon May 13, 2024 10:17 am
othrif wrote: Mon May 13, 2024 10:15 am
KlangFool wrote: Mon May 13, 2024 9:54 am OP,

"It depends"

1) What is the portfolio size versus retirement expense? 25X? 40X? 50X?

2) How is the dividend reinvestment matters in retirement when you need to spend the dividend?

3) It only matters when your portfolio is 50X or above. Then, your dividend/interest income is bigger than your annual expense.

4) That is the most relevant question.

5) In summary, the rule of thumb is your fixed income portion of your portfolio should be at least 10 years of expense. Then, you could survive 10 years of down turn. Stock has been known to be down for 10 years without recovery.

6) In retirement/withdrawal, volatility is real risk. You have to withdraw/sell stock even if the stock market is down for your annual expense.

KlangFool
To get more info related to this scenario: Current age 61. Portfolio size is $500k, expected annual expenses at retirement are $72k. Expect Social Security to contribute another $60k per year at age 70
When is the person planning to retire? 65? 67? 70?

KlangFool
Current plan is age 70 if they can afford it.
So, at 70 years, the person only need 72K - 60K = 12K per year. For 500K, it is about 40X and withdraw at 2.5% per year. What is the problem? What do I missed?

The portfolio could be at 70/30 to 30/70 and it won't matter.

KlangFool
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Topic Author
othrif
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Re: Understanding Volatility during Retirement

Post by othrif »

KlangFool wrote: Mon May 13, 2024 4:27 pm
othrif wrote: Mon May 13, 2024 4:11 pm
KlangFool wrote: Mon May 13, 2024 10:17 am
othrif wrote: Mon May 13, 2024 10:15 am
KlangFool wrote: Mon May 13, 2024 9:54 am OP,

"It depends"

1) What is the portfolio size versus retirement expense? 25X? 40X? 50X?

2) How is the dividend reinvestment matters in retirement when you need to spend the dividend?

3) It only matters when your portfolio is 50X or above. Then, your dividend/interest income is bigger than your annual expense.

4) That is the most relevant question.

5) In summary, the rule of thumb is your fixed income portion of your portfolio should be at least 10 years of expense. Then, you could survive 10 years of down turn. Stock has been known to be down for 10 years without recovery.

6) In retirement/withdrawal, volatility is real risk. You have to withdraw/sell stock even if the stock market is down for your annual expense.

KlangFool
To get more info related to this scenario: Current age 61. Portfolio size is $500k, expected annual expenses at retirement are $72k. Expect Social Security to contribute another $60k per year at age 70
When is the person planning to retire? 65? 67? 70?

KlangFool
Current plan is age 70 if they can afford it.
So, at 70 years, the person only need 72K - 60K = 12K per year. For 500K, it is about 40X and withdraw at 2.5% per year. What is the problem? What do I missed?

The portfolio could be at 70/30 to 30/70 and it won't matter.

KlangFool
The problem is more emotional rather than rational. They are afraid of stock volatility. Their financial advisor who is trying to get them to buy annuities is telling them that the stock market might decline by 30, 40, or even 65% https://markets.businessinsider.com/ne ... ine-2024-5and it might take it 5-10 years to recover.

I am trying to appease their fears by showing them that a conservative allocation of stocks and bonds, say the 30 stock / 70 bonds won’t see a 65% drop and/or won’t last 10 years to recover. I was just lacking visualisation tools to speak to that.
KlangFool
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Re: Understanding Volatility during Retirement

Post by KlangFool »

othrif wrote: Mon May 13, 2024 7:08 pm
KlangFool wrote: Mon May 13, 2024 4:27 pm
othrif wrote: Mon May 13, 2024 4:11 pm
KlangFool wrote: Mon May 13, 2024 10:17 am
othrif wrote: Mon May 13, 2024 10:15 am

To get more info related to this scenario: Current age 61. Portfolio size is $500k, expected annual expenses at retirement are $72k. Expect Social Security to contribute another $60k per year at age 70
When is the person planning to retire? 65? 67? 70?

KlangFool
Current plan is age 70 if they can afford it.
So, at 70 years, the person only need 72K - 60K = 12K per year. For 500K, it is about 40X and withdraw at 2.5% per year. What is the problem? What do I missed?

The portfolio could be at 70/30 to 30/70 and it won't matter.

KlangFool
The problem is more emotional rather than rational. They are afraid of stock volatility. Their financial advisor who is trying to get them to buy annuities is telling them that the stock market might decline by 30, 40, or even 65% https://markets.businessinsider.com/ne ... ine-2024-5and it might take it 5-10 years to recover.

I am trying to appease their fears by showing them that a conservative allocation of stocks and bonds, say the 30 stock / 70 bonds won’t see a 65% drop and/or won’t last 10 years to recover. I was just lacking visualisation tools to speak to that.
Why do that?

"the 30 stock / 70 bonds won’t see a 65% drop and/or won’t last 10 years to recover."

Show them that if they keep 10 years of expense in cash and do not rebalance that 10 years away, they will be fine even in that case.

10 years of cash = 120K.

So, 150K stock, 230K bond, 120K cash. 30:46:24.

Why do you need a spreadsheet to show this?

KlangFool
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Wiggums
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Re: Understanding Volatility during Retirement

Post by Wiggums »

My mom is age 95 and she has 30% stock. Tell them to stop watching the stock market and play catch with the family dog. That’s what we do.
"I started with nothing and I still have most of it left."
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Re: Understanding Volatility during Retirement

Post by Sandtrap »

othrif wrote: Mon May 13, 2024 9:43 am I am helping my parents plan and understand their retirement. I have asked in a different thread about using an annuity as an alternative form of ways to supplement their retirement income viewtopic.php?p=7865616.

I would like to focus here on one point that their financial advisor raised (whom I working very hard to have them stop using):
<snip>
Is it possible to convince your parents to leave this financial advisor with "proof"?

If not, the numbers don't matter, the charts don't matter, etc, because the FA will counter with his/her own generated charts and information. It is going down a "rabbit hole" to play "wack a mole".
The FA has the "home team" advantage. He/She only has to retain the working relationship that your parents might be comfortable with, already.

How would your parents handle financials without this FA, get another? etc?

Are there advantages in retaining this FA and the existing plans?

j :D
dis laimer: just some "elephant in the room" perspectives that might help or remind what is obvious perhaps. Everyone is different in these things.
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watchnerd
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Re: Understanding Volatility during Retirement

Post by watchnerd »

othrif wrote: Mon May 13, 2024 7:08 pm
The problem is more emotional rather than rational. They are afraid of stock volatility. Their financial advisor who is trying to get them to buy annuities is telling them that the stock market might decline by 30, 40, or even 65% https://markets.businessinsider.com/ne ... ine-2024-5and it might take it 5-10 years to recover.

I am trying to appease their fears by showing them that a conservative allocation of stocks and bonds, say the 30 stock / 70 bonds won’t see a 65% drop and/or won’t last 10 years to recover. I was just lacking visualisation tools to speak to that.
If they only need 2.5% withdrawal rate, why not just let them be as conservative as they want?

Nothing wrong with them picking an allocation that is emotionally comfortable if it also meets their financial objective.
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Re: Understanding Volatility during Retirement

Post by KingRiggs »

How about the best of both worlds? Have them figure out their minimum living expenses (food, utilities, housing, transportation, healthcare) and cover those with income which will never run out: social security, pension if they are eligible, and annuity to fill the gap. All remaining funds can be invested in a somewhat more aggressive fashion to cover discretionary spending, counter inflation, etc. The guaranteed income should help them rest assured that at least their basic needs will be met.
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retireIn2020
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Re: Understanding Volatility during Retirement

Post by retireIn2020 »

othrif wrote: Mon May 13, 2024 7:08 pm
KlangFool wrote: Mon May 13, 2024 4:27 pm
othrif wrote: Mon May 13, 2024 4:11 pm
KlangFool wrote: Mon May 13, 2024 10:17 am
othrif wrote: Mon May 13, 2024 10:15 am

To get more info related to this scenario: Current age 61. Portfolio size is $500k, expected annual expenses at retirement are $72k. Expect Social Security to contribute another $60k per year at age 70
When is the person planning to retire? 65? 67? 70?

KlangFool
Current plan is age 70 if they can afford it.
So, at 70 years, the person only need 72K - 60K = 12K per year. For 500K, it is about 40X and withdraw at 2.5% per year. What is the problem? What do I missed?

The portfolio could be at 70/30 to 30/70 and it won't matter.

KlangFool
The problem is more emotional rather than rational. They are afraid of stock volatility. Their financial advisor who is trying to get them to buy annuities is telling them that the stock market might decline by 30, 40, or even 65% https://markets.businessinsider.com/ne ... ine-2024-5and it might take it 5-10 years to recover.

I am trying to appease their fears by showing them that a conservative allocation of stocks and bonds, say the 30 stock / 70 bonds won’t see a 65% drop and/or won’t last 10 years to recover. I was just lacking visualisation tools to speak to that.
The advisor (er...Salesman) is playing on their fear, while at the same time making their eyes light up with the prospect of receiving a very nice payout with the Fixed indexed annuity along with a death benefit, the lie he's telling them is that this is a "Safe" annuity. Question your parents what their plan is if this Insurance company goes out of business.

Your focus should be on two things. 1) what he's not showing them and 2) Showing them other products with similar payouts that have much less risks. Forget about trying to fight it out with this annuity salesman.

Most importantly is, they expect this annuity payout to last their lifetime. If one wants an annuity to last their lifetime, they should only buy from an insurance company that has a Comdex ranking near 100, and it should be a "Mutual" insurance company ( New York Life, Mass Mutual, Nortwestern Mutual etc.).

The product the salesman is pushing is a Global Atlantic annuity which is issued by Accordia Life and Annuity and only has a Comdex rating of 75, and is not a Mutal company.
See the Comdex ranking report here. https://www.riversource.com/binaries/co ... REPORT.PDF

The MYGA route brought up in your other thread is Solid advice. They can lock in a nice return and revisit their situation in 5-7 years when the time comes. There are also DIA's (Deferred Income annuity) where they can purchase a SPIA, defer it for a number of years that build the income payout.
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retireIn2020
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Re: Understanding Volatility during Retirement

Post by retireIn2020 »

Here's an example of a Deferred Income Annuit for a 61 YO Couple, that has a 100% continuation of income after the 1st spouse passes. It also has a death benefit.
Image
https://www.merriam-webster.com/dictionary/abide
GaryA505
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Re: Understanding Volatility during Retirement

Post by GaryA505 »

retireIn2020 wrote: Tue May 14, 2024 2:37 pm Here's an example of a Deferred Income Annuit for a 61 YO Couple, that has a 100% continuation of income after the 1st spouse passes. It also has a death benefit.
Image
I like how they give the break-even age and the rate-of-return right up front. I think New York Life is one of the most respected names in the business, right?
Get most of it right and don't make any big mistakes. All else being equal, simpler is better. Simple is as simple does.
Topic Author
othrif
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Re: Understanding Volatility during Retirement

Post by othrif »

retireIn2020 wrote: Tue May 14, 2024 2:37 pm Here's an example of a Deferred Income Annuit for a 61 YO Couple, that has a 100% continuation of income after the 1st spouse passes. It also has a death benefit.
Image
This is great, thank you!
Does this change if it is tax deferred accounts like 401k and IRA?
Topic Author
othrif
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Re: Understanding Volatility during Retirement

Post by othrif »

retireIn2020 wrote: Tue May 14, 2024 2:12 pm
othrif wrote: Mon May 13, 2024 7:08 pm
KlangFool wrote: Mon May 13, 2024 4:27 pm
othrif wrote: Mon May 13, 2024 4:11 pm
KlangFool wrote: Mon May 13, 2024 10:17 am

When is the person planning to retire? 65? 67? 70?

KlangFool
Current plan is age 70 if they can afford it.
So, at 70 years, the person only need 72K - 60K = 12K per year. For 500K, it is about 40X and withdraw at 2.5% per year. What is the problem? What do I missed?

The portfolio could be at 70/30 to 30/70 and it won't matter.

KlangFool
The problem is more emotional rather than rational. They are afraid of stock volatility. Their financial advisor who is trying to get them to buy annuities is telling them that the stock market might decline by 30, 40, or even 65% https://markets.businessinsider.com/ne ... ine-2024-5and it might take it 5-10 years to recover.

I am trying to appease their fears by showing them that a conservative allocation of stocks and bonds, say the 30 stock / 70 bonds won’t see a 65% drop and/or won’t last 10 years to recover. I was just lacking visualisation tools to speak to that.
The advisor (er...Salesman) is playing on their fear, while at the same time making their eyes light up with the prospect of receiving a very nice payout with the Fixed indexed annuity along with a death benefit, the lie he's telling them is that this is a "Safe" annuity. Question your parents what their plan is if this Insurance company goes out of business.

Your focus should be on two things. 1) what he's not showing them and 2) Showing them other products with similar payouts that have much less risks. Forget about trying to fight it out with this annuity salesman.

Most importantly is, they expect this annuity payout to last their lifetime. If one wants an annuity to last their lifetime, they should only buy from an insurance company that has a Comdex ranking near 100, and it should be a "Mutual" insurance company ( New York Life, Mass Mutual, Nortwestern Mutual etc.).

The product the salesman is pushing is a Global Atlantic annuity which is issued by Accordia Life and Annuity and only has a Comdex rating of 75, and is not a Mutal company.
See the Comdex ranking report here. https://www.riversource.com/binaries/co ... REPORT.PDF

The MYGA route brought up in your other thread is Solid advice. They can lock in a nice return and revisit their situation in 5-7 years when the time comes. There are also DIA's (Deferred Income annuity) where they can purchase a SPIA, defer it for a number of years that build the income payout.
This is a great perspective, thank you!

If I may ask, what is the significance of the term “Mutual” for an insurance?
retireIn2020
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Re: Understanding Volatility during Retirement

Post by retireIn2020 »

othrif wrote: Tue May 14, 2024 8:05 pm
retireIn2020 wrote: Tue May 14, 2024 2:37 pm Here's an example of a Deferred Income Annuit for a 61 YO Couple, that has a 100% continuation of income after the 1st spouse passes. It also has a death benefit.
Image
This is great, thank you!
Does this change if it is tax deferred accounts like 401k and IRA?
It may change; however, I used the same information in the Global Atlantic annuity quote in the Picture you posted, so the question is same for the Annuity salesman.

Some states do have a limit on the amount that can be invested due to QLAC guidelines. This may be a case where you have to purchase the DIA in smaller amounts from different Insurance companies.

You might contact Stan the annuity man or blueprint income (Owned by Mass Mutual) for guidance. They are both highly rated and will put your parents in the "Correct" annuity.
https://www.stantheannuityman.com/
https://www.blueprintincome.com/fixed-annuities

Both of these companies can be researched here on Bogleheads, and you'll find they are excellent to do business with.

You can also contact Fidelity in the same regard. Fidelity only uses Insurance companies at the top of the Comdex rankings list. I'd highly recommend going with an insurance company with at 96 or above Comdex regardless of who you choose for a lifetime annuity.

There is no reason to look any further than these three companies.

On the flipside, have your parents considered purchasing a lower upfront cost income annuity and balance that with the remainder in a 50/50 balanced portfolio? Say a $250k DIA and $250k 50/50 (VTI/MYGA, MM, CD, MYGA etc.). That may be the sweet spot.
Last edited by retireIn2020 on Tue May 14, 2024 11:41 pm, edited 1 time in total.
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GaryA505
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Location: New Mexico

Re: Understanding Volatility during Retirement

Post by GaryA505 »

I didn't know Mass Mutual owned Blueprint Income. Interesting!
Get most of it right and don't make any big mistakes. All else being equal, simpler is better. Simple is as simple does.
retireIn2020
Posts: 808
Joined: Sat Jan 04, 2020 5:13 pm

Re: Understanding Volatility during Retirement

Post by retireIn2020 »

othrif wrote: Tue May 14, 2024 8:08 pm
retireIn2020 wrote: Tue May 14, 2024 2:12 pm
othrif wrote: Mon May 13, 2024 7:08 pm
KlangFool wrote: Mon May 13, 2024 4:27 pm
othrif wrote: Mon May 13, 2024 4:11 pm

Current plan is age 70 if they can afford it.
So, at 70 years, the person only need 72K - 60K = 12K per year. For 500K, it is about 40X and withdraw at 2.5% per year. What is the problem? What do I missed?

The portfolio could be at 70/30 to 30/70 and it won't matter.

KlangFool
The problem is more emotional rather than rational. They are afraid of stock volatility. Their financial advisor who is trying to get them to buy annuities is telling them that the stock market might decline by 30, 40, or even 65% https://markets.businessinsider.com/ne ... ine-2024-5and it might take it 5-10 years to recover.

I am trying to appease their fears by showing them that a conservative allocation of stocks and bonds, say the 30 stock / 70 bonds won’t see a 65% drop and/or won’t last 10 years to recover. I was just lacking visualisation tools to speak to that.
The advisor (er...Salesman) is playing on their fear, while at the same time making their eyes light up with the prospect of receiving a very nice payout with the Fixed indexed annuity along with a death benefit, the lie he's telling them is that this is a "Safe" annuity. Question your parents what their plan is if this Insurance company goes out of business.

Your focus should be on two things. 1) what he's not showing them and 2) Showing them other products with similar payouts that have much less risks. Forget about trying to fight it out with this annuity salesman.

Most importantly is, they expect this annuity payout to last their lifetime. If one wants an annuity to last their lifetime, they should only buy from an insurance company that has a Comdex ranking near 100, and it should be a "Mutual" insurance company ( New York Life, Mass Mutual, Nortwestern Mutual etc.).

The product the salesman is pushing is a Global Atlantic annuity which is issued by Accordia Life and Annuity and only has a Comdex rating of 75, and is not a Mutal company.
See the Comdex ranking report here. https://www.riversource.com/binaries/co ... REPORT.PDF

The MYGA route brought up in your other thread is Solid advice. They can lock in a nice return and revisit their situation in 5-7 years when the time comes. There are also DIA's (Deferred Income annuity) where they can purchase a SPIA, defer it for a number of years that build the income payout.
This is a great perspective, thank you!

If I may ask, what is the significance of the term “Mutual” for an insurance?
I suppose these links will explain it better than I can. :D
https://blog.massmutual.com/insurance/m ... -companies
https://www.usnews.com/insurance/glossa ... ce-company
https://www.investopedia.com/terms/m/mutualcompany.asp

Basically, a Mutual is owned by its policy holders and not the open (Stock) market i.e. Global Atlantic.

(Edit)
Oh, one more thing, pay attention to "Cash Reserves" Mutual companies keep a much higher level of cash reserves in order to pay claims.

It's said that New York Life could pay every claim if all annuitants made claims at the same time.
Last edited by retireIn2020 on Tue May 14, 2024 11:59 pm, edited 6 times in total.
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retireIn2020
Posts: 808
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Re: Understanding Volatility during Retirement

Post by retireIn2020 »

GaryA505 wrote: Tue May 14, 2024 11:11 pm I didn't know Mass Mutual owned Blueprint Income. Interesting!
Part of the MassMutual family
MassMutual
Blueprint Income is a subsidiary of MassMutual. Our firm joined the organization in February 2021 because our companies share a purpose: to help people secure their future and protect the ones they love. We do this by offering innovative retirement income solutions through a simplified, digital, and customer-centric user experience. As an autonomous company, Blueprint seeks to offer the best annuity products on the market to help our clients achieve financial security.
https://www.blueprintincome.com/about-u ... lsrc=aw.ds
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Topic Author
othrif
Posts: 29
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Re: Understanding Volatility during Retirement

Post by othrif »

retireIn2020 wrote: Tue May 14, 2024 2:37 pm Here's an example of a Deferred Income Annuit for a 61 YO Couple, that has a 100% continuation of income after the 1st spouse passes. It also has a death benefit.
Image
This is great! Could you help me navigate the options in the website to get this exact annuity?
retireIn2020
Posts: 808
Joined: Sat Jan 04, 2020 5:13 pm

Re: Understanding Volatility during Retirement

Post by retireIn2020 »

othrif wrote: Wed May 15, 2024 11:16 am
retireIn2020 wrote: Tue May 14, 2024 2:37 pm Here's an example of a Deferred Income Annuit for a 61 YO Couple, that has a 100% continuation of income after the 1st spouse passes. It also has a death benefit.
This is great! Could you help me navigate the options in the website to get this exact annuity?
Sure, 1st create an account with Blueprintincome, it's best to have a sign on so that you more easily navigate the search results and modify the inputs to make comparisons.
https://www.blueprintincome.com/log-in

Once you log on, go the home page https://www.blueprintincome.com/
From the top menu select the Income Annuities drop down and click on Income annuities.
You will get asked a series of questions, just fill them out.

Once the results appear, Notice the left side menu. From there you click on several options that can be changed "Personal Information" and "Annuity Information". Under Annuity Information you can select a Income start date that can be changed to see different deferral payouts.
When you make any changes from there, you'll see an orange bar pop up where you have to select "Refresh Quotes" to see the new results.

On the right side, you'll see links to see the details of each quote.
Image
Last edited by retireIn2020 on Thu May 16, 2024 12:16 am, edited 2 times in total.
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Topic Author
othrif
Posts: 29
Joined: Tue Nov 10, 2020 9:50 pm

Re: Understanding Volatility during Retirement

Post by othrif »

retireIn2020 wrote: Wed May 15, 2024 1:51 pm
othrif wrote: Wed May 15, 2024 11:16 am
retireIn2020 wrote: Tue May 14, 2024 2:37 pm Here's an example of a Deferred Income Annuit for a 61 YO Couple, that has a 100% continuation of income after the 1st spouse passes. It also has a death benefit.
This is great! Could you help me navigate the options in the website to get this exact annuity?
Sure, 1st create an account with Blueprintincome, it's best to have a sign on so that you more easily navigate the search results and modify the inputs to make comparisons.
https://www.blueprintincome.com/log-in

Once you log on, go the home page https://www.blueprintincome.com/
From the top menu select the Income Annuities drop down and click on Income annuities.
You will get asked a series of questions, just fill them out.

Once the results appear, Notice the left side menu. From there you click on several options that can be changed "Personal Information" and "Annuity Information". Under Annuity Information you can select a Income start date that can be changed to see different deferral payouts.
When you make any changes from there, you'll see an orange bar pop up where you have to select "Refresh Quotes" to see the new results.

On the right side, your see links to see the details of each quote.
Image
Thank you so much! And how can I find the cost of this annuity?
WeakOldGuy
Posts: 647
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Re: Understanding Volatility during Retirement

Post by WeakOldGuy »

watchnerd wrote: Tue May 14, 2024 9:07 am
If they only need 2.5% withdrawal rate, why not just let them be as conservative as they want?

Nothing wrong with them picking an allocation that is emotionally comfortable if it also meets their financial objective.
I agree with this. You really don't want to get into a situation where you are trying to convince your folks to see things your way. As Watchnerd points out, they are in a good financial situation. The only downside to being overly conservative is that they leave potential growth on the table. If they gain peace of mind, they may be way ahead. Besides, if they aren't comfortable with another plan they run the risk of not sticking to it when a downturn occurs.
On investing; I have lots of questions, many opinions, and little knowledge. A dangerous combination. Be warned.
retireIn2020
Posts: 808
Joined: Sat Jan 04, 2020 5:13 pm

Re: Understanding Volatility during Retirement

Post by retireIn2020 »

othrif wrote: Wed May 15, 2024 5:45 pm Thank you so much! And how can I find the cost of this annuity?
You enter that in the questions when getting the quotes. In the screen shot I shared, look in the red circle for "Amount".
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Topic Author
othrif
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Joined: Tue Nov 10, 2020 9:50 pm

Re: Understanding Volatility during Retirement

Post by othrif »

retireIn2020 wrote: Wed May 15, 2024 11:21 pm
othrif wrote: Wed May 15, 2024 5:45 pm Thank you so much! And how can I find the cost of this annuity?
You enter that in the questions when getting the quotes. In the screen shot I shared, look in the red circle for "Amount".
I meant besides the intial premium, are there other fees. Say 1% of the portfolio value every year?
retireIn2020
Posts: 808
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Re: Understanding Volatility during Retirement

Post by retireIn2020 »

othrif wrote: Thu May 16, 2024 7:43 am
retireIn2020 wrote: Wed May 15, 2024 11:21 pm
othrif wrote: Wed May 15, 2024 5:45 pm Thank you so much! And how can I find the cost of this annuity?
You enter that in the questions when getting the quotes. In the screen shot I shared, look in the red circle for "Amount".
I meant besides the intial premium, are there other fees. Say 1% of the portfolio value every year?
SPIA's and MYGA Annuities do not have fees. The broker that sells the annuity is paid a commission for selling the contract by the insurance company. Basically, you pay the initial Premium and receive exactly what is quoted in the contract.

I would suggest you do a forum search for SPIA and MYGA and do some reading. You can also go to Stan the annuity man's YouTube channel for excellent educational videos.

https://www.youtube.com/@StanTheAnnuityMan/videos
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ondarvr
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Re: Understanding Volatility during Retirement

Post by ondarvr »

My numbers are very close to theirs and to make things much less stressful and assure a greater chance of success, I went a totally different direction.

About ten years ago our retirement situation changed drastically due to life just happening. We went from two good carriers and incomes to my wife becoming disabled and me unemployed, plus some other random stuff thrown it to further complicate everything. So our plans had to change.

I looked at what our projected income would be at retirement and planned backwards from there. The goal became not so much, how can I increase my nest egg (which took a huge beating during these events), to I have this much reasonably assured income I can count on in retirement, so let's make a plan on living on that amount. Plus our income dropped immensely, my wife couldn't work, and my new job didn't pay as much.

It took a bit of time to get there, but we forged ahead to pay off every debt, including the house, trim all unnecessary expenses, etc.

For more than three years we've lived on the dollar figure that I calculated I would receive at 67, and even saved (spent less) a bit out of that number.

Now at 68 my actual estimated retirement income has increased, but my spending didn't increase by the same amount, so there's a possible surpluse. It also allowed me to continue saving at a high rate which makes everything look even better.

Right now with my current living expenses, I won't need to withdraw money after retirement to continue living my current lifestyle. That is a huge weight removed from my shoulders and improves my mental state immensely.

So while my actual dollar figure set aside for retirement is rather low compared to most on this site, my chances of living a pleasant and less stressful retirement is probably much higher.
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