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A Floor with an Upside: The Best Strategy for Lifetime Income?
Old 09-21-2012, 11:56 AM   #1
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A Floor with an Upside: The Best Strategy for Lifetime Income?

Not new, a topic that's been discussed here periodically. The article is not long or detailed, but it's a good overview. If you've already given guaranteed floor income due consideration you won't learn anything from this article. If you haven't and your guaranteed income sources (Soc Sec, pensions/annuities, other ongoing incomes sources) fall well short of meeting your essential living expenses, it's something every retiree should at least think about IMO. A Floor with an Upside: The Best Strategy for Lifetime*Income? - Home - Can I Retire Yet - Your Retirement Roadmap
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Could you live off your investment portfolio indefinitely, if you had too? The answer to that question lies in the relationship among your total assets, your living expenses, your investing skill, the length of your retirement, market valuations when you retire, and market performance thereafter. That's a lot of variables, only some of which you can control…

This process starts by first understanding your essential living expenses.

Next you must add up all the guaranteed, inflation-adjusted sources of income that you can rely on receiving at retirement. Many of us can count on some Social Security and/or other pensions.

Finally you compare those two values. If your expenses exceed your income, as they will for many, you must "backfill" up to the amount of your essential expenses from a new guaranteed income source.
I noticed one of our Mods among the comments, so he's read it...
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Old 09-21-2012, 12:26 PM   #2
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I read the article and see his point.

I have to ask this question: Isn't one of the reasons we have a portfolio balanced between stocks and bonds for the times when the stock market is low? At those times we can sell our shorter term bond assets and give the stocks time to recover. Right? Or am I missing something?

Another question: It's not as simple as COLA'd versus non COLA'd pensions/annuities. Today, many DB pensions have a partial COLA. The cap is usually set at 2-3% annually from what I have observed. How does one adjust for the more common partially COLA'd pensions that many of us have?
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Old 09-21-2012, 01:46 PM   #3
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I see the lure of such a plan and I wouldn't suggest that it's a "bad" plan. However, even with inflation riders on an annuity plus COLA's on pensions/SS, there is NO guarantee that inflation won't burn down such a plan if it gets bad enough. Most COLA's don't really completely cover inflation in good times. If for no other reason than tax-bracket creep, COLA's usually only soften the blow. During bad times (high inflation) such a plan (any plan?) could fail rather quickly IMO. In short, I've yet to find a "plan" which gives any "guarantees" about inflation. All the typical plans (balanced portfolio, "buckets", Otar, etc. etc.) work - until they don't. Picking between the various options probably comes down to comfort level. I see why this one might be popular.

Show me a plan which guarantees to survive significant inflation and I'm all over it. Other than that, I see them as pretty much the same - just a different way to look at the issues of income/growth/inflation. I'm no expert, so YMMV.
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Old 09-21-2012, 01:51 PM   #4
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How does one adjust for the more common partially COLA'd pensions that many of us have?
Just for my own peace of mind, when I run projections of my future financial status, I make these two assumptions:

1. My spending will increase at the rate of inflation.
2. The future COLA on my pension/SocSec will be between 1/3 and 1/2 the inflation rate.
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Old 09-21-2012, 02:35 PM   #5
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Originally Posted by braumeister

Just for my own peace of mind, when I run projections of my future financial status, I make these two assumptions:

1. My spending will increase at the rate of inflation.
2. The future COLA on my pension/SocSec will be between 1/3 and 1/2 the inflation rate.
That was kind of what I did, to ensure I had enough income safety down the road, as my COLA was reduced to 2% fixed instead of CPI. I got lucky this past fiscal year, as we got the 2%, but CPI was only 1.7%.
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Old 09-21-2012, 06:00 PM   #6
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kind of like longevity insurance
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Old 09-21-2012, 07:41 PM   #7
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The very FIRST sentence in the article, you know, the one that is supposed to suck us in and arouse our interest in the article is,
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Could you live off your investment portfolio indefinitely, if you had too?
(groan)

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Old 09-22-2012, 09:44 AM   #8
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Could you live off your investment portfolio indefinitely, if you had too?

My calculations say yes. But as discussed before, the main reason I 'might' buy an annuity is protection from poor financial decisions I might make due to mental instability as I age. Then again......some might think I have already entered a period of mental instability if I'm thinking about an annuity.

If I ever get one, it won't be anytime soon. Plenty if time to mull over the idea.
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Old 09-22-2012, 10:52 AM   #9
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The very FIRST sentence in the article, you know, the one that is supposed to suck us in and arouse our interest in the article is,

(groan)

I won't say a word... I won't say a word... I won't say a word...
I probably could, if I had two.
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Old 09-22-2012, 11:36 AM   #10
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The article seems to assume that relying upon withdrawals from your portfolio is too risky to meet your essential income floor (well, indicates that it might be OK with a 2% or 3% withdrawal rate) and pushes annuities as an alternative. Fair enough, but the author mentions none of the downsides of annuities particularly the risk of the insurer going broke. To me, that is the huge negative of annuities in that situation. You are turning over your money to someone who can always go broke keeping your money and leaving you broke (yes, I know about the guaranty funds but I also know their limitations).
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Old 09-22-2012, 01:56 PM   #11
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There have been no significant insurer insolvencies since risk based capital solvency standards were put in place about 20 years ago. Between solvency standards and monitoring, the roles played by the rating agencies and the backstop of state guaranty funds the risk of loss is very low - IMO much lower than a corporate bond, but higher than a US government bond (though some days I wonder about that). That includes the economic downturn of 2008-2009 which tested the industry but they came through it ok (unlike the banks).
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Old 09-22-2012, 06:10 PM   #12
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the real problem is having the deal you signed on for altered as insurance companies struggle with trying to keep the guarantees they made.

already we seen prudential stop allowing anymore money into 14 different annuity products.

transamerica and axa are offering lump sum cash to policy holders to let them off the hook for some of the promises.

im a big believer of having some pensionized income in a plan but im reserving my opinion on annuities until the smoke clears and we see just whats what.
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Old 09-23-2012, 12:01 AM   #13
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There have been no significant insurer insolvencies since risk based capital solvency standards were put in place about 20 years ago.
That's nice to know. But if I decide I want to use an annuity, I intend to hold it and receive payments for a lot longer than 20 years. Given that there have been (and likely will again be) significant changes in solvency standards as recently as 20 years ago I will be considering that as part of my assessment of how "safe" an annuity payout really is.
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Old 09-23-2012, 04:36 AM   #14
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While I would consider ananuuity it is way down the list of fall back positions just ahead of a reverse mortgage.
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Old 09-23-2012, 03:08 PM   #15
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I may have missed it, but all I saw was how to add up your inflation protected, secure income flows, and if inadequate, buy an annuity. But where are the inflation protected annuities?

Until there is a reasonable market in these things, it seems crazy to just imagine that the fixed annuity that you buy will in fact give you meaningful protection toward real income needs.

I think that a reasonably diversified set of well chosen dividend paying stocks should fill the bill. Not high payers, but companies that give some good indication that they should be able to pay and increase dividends for a long time, or a quality dividend focused ETF, should work pretty well. Is it certain? No, but it is likely that anyone who is not asleep at the wheel should be OK, within the limits of human life. A good set of high quality dividend payers probably is more likely to deliver some reasonable degree of stable real income than a given marriage is likely to last for 10 years.

On this board we are very fond of absolute security, but there really isn't much of that to be found in any realm. Instability is not limited to financial matters.

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Old 09-23-2012, 04:42 PM   #16
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I may have missed it, but all I saw was how to add up your inflation protected, secure income flows, and if inadequate, buy an annuity. But where are the inflation protected annuities?
Are fully inflation protected immediate lifetime annuities no longer available? I have no idea. Vanguard used to have them listed on their website, IIRC, although they were costly. I don't know if they still have them.
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Old 09-23-2012, 07:08 PM   #17
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i looked at the supposed low cost ones a while ago from fidelity and vanguard .

they really werent so low cost.

right off the bat fidelitys was cheaper because there was no death benefit compared to others.

the variable really werent a great deal as best as i could figure out.

it looks like depending on age you got a 4-6% withdrawal... the expenses ran almost 3% .

the deal is if at anytime your balance goes higher then you started with you lock in a new high water mark.

now im not great at math but it looks to me that bewtween pulling a 4-6% withdrawal and 3% expenses the markets would have to have a crazy gain to get you anything above the min payout.
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Old 09-24-2012, 08:23 PM   #18
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I may have missed it, but all I saw was how to add up your inflation protected, secure income flows, and if inadequate, buy an annuity. But where are the inflation protected annuities?
Right. Back when I knew about this stuff, none of the VA's with "guaranteed lifetime withdrawal benefits" had inflation protection. Unless times have changed, that possibility shouldn't be on his list.

There used to be SPIA's that were indexed to the CPI. The rational investment for insurers to back those annuities is TIPS, and we all know about the yield on TIPS. I haven't checked rates recently, but I expect payouts in the 3% of premium range.
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Old 09-24-2012, 09:31 PM   #19
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There used to be SPIA's that were indexed to the CPI. The rational investment for insurers to back those annuities is TIPS, and we all know about the yield on TIPS. I haven't checked rates recently, but I expect payouts in the 3% of premium range.
If that's the case, why not buy dividend stock, instead, get as much payout and keep a growing principal? I know that dividends are not 100% guaranteed, but neither is the survival of insurers...
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Old 09-24-2012, 09:52 PM   #20
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If that's the case, why not buy dividend stock, instead, get as much payout and keep a growing principal? I know that dividends are not 100% guaranteed, but neither is the survival of insurers...
nor government debt
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