Another annuity question

[mathjak107]

think about this

from 1987 to 2003 the s&p returned 13.47% a year average return... those 17 years saw an amazing return i would say and as good as it gets.

inflation ran 4% over that time frame. if you follow the old rule of thumb that everything over the amount of inflation is free to be withdrawn ,than leaving 4% of the gains with the house could have had a new retiree pulling 10% inflation adjusted for 17 years theoretically out.

now for the fun. starting with 1 million in the s&p500

randomly taking the years gains and losses over that time frame and changing how the order came in left you with a balance that ranged
from 77,000 left to a mind blowing deficit of 186,000. thats just incredible that just by shifting the order of things like that when in our decumulation stage that it could have such a difference in results from the greatest gains ever.

the order of gains and losses means nothing in our accumulation stage . it all works out the same no matter what the order.

it takes on a whole new outcome in the decumulation stage. its an amazing factor.

of course no one would have actually done that but it illustrates the power of the order of our gains and losses is far greater in retirement than the actual gains and losses.

the more we are able to fill in those downturns with any pensionized income the bigger the effect overall on our portfolio.

 

[rescueme]

I just know that doing an annuity quote while interest rates are so low bring back a much lower quote than when interest rates are higher.

So what do you use for income that the annuity was to supply while you wait for interest rates to get to a level you are willing to accept?

Sure, your monthly annuity income (speaking as an SPIA only) rises the later you wait to get one. That's not because of a higher interest rate but simply an early return on your preimum paid since your expected lifespan is lower than if you get one earlier in retirement - the same situation as SS.

You can wait for interest rates for a long time before you start seeing immediate income. It's a lot like early SS at age 62; you can get a higher rate if you wait but if you need the income earlier (to live on), that higher monthly payment in the future means little.

Folks put too much importance on current interest rates in discussion of an SPIA or any other immediate draw product. That's only part of the equation of use of the product. Remember, it's an income - not an investment vehicle.

In my situation, the purchase of the SPIA included other factors such as removal of a portion of my portfolio to market flux along with reducing future RMD's on the preimum paid (RMD's are considered covered for a life policy). Those were additional factors that were part of my decision process.

 

[jIMOh]

its really all about the plan and withdrawl amount you need.
its no no longer about not growing richer but about not growing poorer through retirement.

its always nice to have higher rates but they may not be needed. that pensionized income coming in may be just the thing to fill in those valleys and dips we have like now just to keep you from killing off to many of those geese laying the golden eggs by spending to much down.

thats why new studies are showing that injecting as little as even a 20% non inflation adjusted pensionized income greatly brings up your success rate.

it works best in conservative portfolios 30-35% equity where equity gains may be alot less long term than more aggressive portfolios .

as i said many times the order our gains and losses come in plays a much larger part in our success rate than how high our gains are. the same is true here. if the amount of pensionized income is keeping you from selling more equities and the numbers work for you than its better than not having that income.

what your really trying to do is get some protection from those gains and losses coming in at really bad combinations.


Annuity Income May Increase Portfolio Survival - Registered Investment Advisor

Good read, thank you.

What's the message for you and me?

Simple. More equity, not less, increases portfolio survival odds. More current income, not less, also increases portfolio survival odds. The hard part is that the two positives are mutually exclusive.

 

[brewer12345]

I find professor Milevsky's work convincing, but I think the way to get the income stream is ideally a pension, SS or a spia, not a VA. This is one reason I am hell bent on making it to 5 years with my employer. At that point I vest in a small pension with the option to buy more credit.

 

[FinanceDude]

I find professor Milevsky's work convincing, but I think the way to get the income stream is ideally a pension, SS or a spia, not a VA. This is one reason I am hell bent on making it to 5 years with my employer. At that point I vest in a small pension with the option to buy more credit.

Agreed, but probably 85% of all folks don't get a pension, and we know SS is going to be cut. So, hope SPIA rates are good when you need one? Insurers would have you believe there's a reason they overprice VAs...

 

[easysurfer]

its really all about the plan and withdrawl amount you need.
its no no longer about not growing richer but about not growing poorer through retirement.

its always nice to have higher rates but they may not be needed. that pensionized income coming in may be just the thing to fill in those valleys and dips we have like now just to keep you from killing off to many of those geese laying the golden eggs by spending to much down.

thats why new studies are showing that injecting as little as even a 20% non inflation adjusted pensionized income greatly brings up your success rate.

it works best in conservative portfolios 30-35% equity where equity gains may be alot less long term than more aggressive portfolios .

as i said many times the order our gains and losses come in plays a much larger part in our success rate than how high our gains are. the same is true here. if the amount of pensionized income is keeping you from selling more equities and the numbers work for you than its better than not having that income.

what your really trying to do is get some protection from those gains and losses coming in at really bad combinations.


Annuity Income May Increase Portfolio Survival - Registered Investment Advisor

Thanks for the link. It's a very interesting read. It does make a lot of sense when you think about it. When the market tanks, it sure is nice to know that no matter what, there still is a steady income stream no matter what.

Now it looks like those with a conservative portfolio can choose to get an annuity without feeling guilty

 

[brewer12345]

Agreed, but probably 85% of all folks don't get a pension, and we know SS is going to be cut. So, hope SPIA rates are good when you need one? Insurers would have you believe there's a reason they overprice VAs...

I personally think VAs are about as good a product as LTC insurance (ie awful). The spia market is quite competitive so rates are what they ad. At least they are easy to understand and compare between insurers.

 

[FinanceDude]

I personally think VAs are about as good a product as LTC insurance (ie awful). The spia market is quite competitive so rates are what they ad. At least they are easy to understand and compare between insurers.

I agree with you on that. Today's SPIA rates are not that great, due to historic low interest rates. However, I definitely will have some portion of my retirement funded by a SPIA.

I went to a seminar that actually was advocating a buckets of money startegy involving buying SPIAS every 5 years (5 year payouts), interesting empirical data.

 

[mathjak107]

im curious how they worked those into the buckets and the effect?.

im toying with ideas for doing that too but im not quite sure how i went to incorporate them. i was thinking 5 year increments too in the cash bucket.

 

[chinaco]

IMO - Otar provides a decent decision framework. His is heavily tilted toward comparing risks related to using a portfolio to produce income to certain annuities (for payout).

These types of decisions (IMO) often fall into the fear/greed category....

Most people do not really understand all of the issues and some take positions based on looking at some historic index or some expert or whatever... that may be completely irrelevant. Will the future turn out that way... maybe. More important, will their future turn out the way they assume ....maybe but maybe not. Many many people make poor decisions.


IMO - people should not take any risk with their daily bread!!! Yes there are always risks... but the tools are what they are today. I am talking about making prudent and conservative decisions. We should all have a safety net constructed.


My plan has a few safety nets. It includes the use of.... dare I say... a few insurance products.....

Frankly, I am glad they exist. But I will be the first to admit, they are not cheap, and one can make bad decisions in terms of identifying their needs and the purchase decision (product selection and timing of it).

 

[rescueme]

I went to a seminar that actually was advocating a buckets of money startegy involving buying SPIAS every 5 years (5 year payouts), interesting empirical data.

Not lifetime SPIA's?

While I/DW have an SPIA, I would think that your return would be less due to the limited time you have a term SPIA, and a short-term interest forecast - based solely on current rates.

Even in early 2007 when we purchased ours, our return (of course including preimum paid) was higher than the prevailing interest rate at the time. That was computed not on what was a short-term rate, but closer to a 30-year interest forecast.

I will agree with the idea of multiple SPIA's, purchased as they make sense (not just on current interest rates), which is what we plan to do over time...

 

[chinaco]

I agree with you on that. Today's SPIA rates are not that great, due to historic low interest rates. However, I definitely will have some portion of my retirement funded by a SPIA.

I went to a seminar that actually was advocating a buckets of money startegy involving buying SPIAS every 5 years (5 year payouts), interesting empirical data.

I think Lucia point to annuities as a possibility for a bucket.

Can you point to a whitepaper on it?

Are the annuities used in the study life payout or period certain annuities or just deferred annuity contracts that are cashed out when the back end load (penalty period) is over?

 

[FinanceDude]

I think Lucia point to annuities as a possibility for a bucket.

Can you point to a whitepaper on it?

Are the annuities used in the study life payout or period certain annuities or just deferred annuity contracts that are cashed out when the back end load (penalty period) is over?

They didn't have a whitpaper on it. I will try to dig. However, I think the basis is similar to what Ray Lucia advocates. However, since we all know rates fluctuate, you want to keep some dry powder. They suggested figuring out what your "must have" income number is. Let's say its $20,000 a year. You put enough into a 5 year SPIA to get that, and keep the rest of assets allocated as you see fit. Then in 5 years, your reasess based on how the market did, etc.

At another seminar, a large insurer showed the same thing, but espoused using a VA with living benefit rider to "take over" at the 5 year mark. Most in the audience were not that all enthused about it.

 

[easysurfer]

On laddering annuities...

Laddering Annuities - Financial Planning

Once again, talks about annuties along with equites, bonds as opposed to equties, bonds alone.