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Do you know/monitor your annuitization hurdle?
Old 01-11-2016, 03:12 PM   #1
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Do you know/monitor your annuitization hurdle?

Unless your floor income is guaranteed, IMHO it would be wise for all retirees to know how their nest egg stacks up against their annuitization hurdle, which changes with age and SPIA % payouts (correlated to yield/interest rates). I check ours quarterly, but odds are we will never act on it. If you don't act on it that's fine, but I'd think we'd all want to be conscious of crossing that line, there may be no return...

YMMV

http://www.schulmerichandassoc.com/M...cumulation.pdf
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Old 01-11-2016, 03:23 PM   #2
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Interesting read and a useful perspective. We occasionally look at immediate annuitization of chunks of the portfolio of various sizes to see what we can generate that way vs what we're earning on the trading and investing activity that currently funds things ... like the OP (I think) and many on this board, we're highly unlikely to ever do this, but it's good to know what we could 'lock in' if it ever came to that.
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Old 01-11-2016, 03:29 PM   #3
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It was an interesting article. I have not done this, and may not find it worth the effort in my case. I only need a <2% WR to meet my target. Interesting to think about though, and it may good for some.
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Old 01-11-2016, 08:59 PM   #4
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I think this is interesting:

Quote:
Many financial planning approaches use a portfolio value of zero as the threshold for plan success or failure (X percent chance your portfolio will last for Y years).
This method considers failure to mean “financial ruin.”

In contrast, the portfolio decumulation framework uses the cost to annuitize as the threshold for success or failure (X percent chance your portfolio will last for Y years and still retain enough value to annuitize a guaranteed lifetime income).
This method considers failure to mean "having to annuitize your assets before you really hoped to."

For most retirees, this is a more comforting threshold to use than financial ruin.
Before I retired, I looked at annuitization costs and did a couple point estimates. I called this "Plan B", what we'd do if our assets shrunk faster than I expected. We had a lot of cushion, so the probability of implementing Plan B seemed low.

I wonder what we'd see if FireCalc had the option of providing the second set of numbers in the quote above. I expect that people retiring very close to the edge would find a substantial probability that they'd have to annuitize rather quickly.


(Of course, all this assumes some active market for inflation adjusted SPIAs. When I retired, I thought such a market was just around the corner. Now it seems to be off in another universe.)
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Old 01-11-2016, 10:43 PM   #5
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This could be a good option for someone quite elderly, who doesn't want the fluctuation of the investment markets, since they may not outlive the down-cycle.

Example 90 yr old has $50K to invest, sure they get SS but having the extra cash allows more spending.
A quick look at an immediate annuity for $50K would provide a yearly income of $10,236.

If they make it past 5 years they win big, if they don't, it does not really matter.
I imagine it would be comforting, knowing they can spend that much each year without worries.
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Old 01-12-2016, 07:18 AM   #6
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Midpack - where do you get your annuity cost estimates?
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Old 01-12-2016, 08:18 AM   #7
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Quote:
Originally Posted by donheff View Post
Midpack - where do you get your annuity cost estimates?
https://www.immediateannuities.com/a...FYU9aQod1XoI5g

It's not perfect, but I wanted a consistent, easily accessible source. I use the same assumptions each time. It doesn't need to be perfect, as I have no intention of getting close to our hurdle (IMO if you wait until then, odds are you're in the midst of a correction and you may cross the line so fast you lose the chance to act). But I have gotten quotes from Vanguard and other sources once a ear or so.

I check and plot our nest egg $ vs our full income $ quarterly.

Food for thought, using your annuitization hurdle to arrive at the non-equity/fixed income % for your AA might be a wise consideration...
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Old 01-12-2016, 09:59 AM   #8
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Thanks Midpack. That gives a nice quick snapshot of what you can get a straightforward SPIA for. I looked into Vanguard and they pass you to Income Solutions® Home Page which lets you get multiple estimates that include inflation increases for those who like to add those in.
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Old 01-12-2016, 10:23 AM   #9
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I'm simply not going to have this problem. 8 months into retirement and I realize despite what Mr. Market does now and in the future, I've probably saved too much. This I because I never have been and don't see myself being a high rolling spender. I just don't get the sense of identity or satisfaction out of spending (although I did have about $50K of pent-up spending this last year!). Possible annuitization has always been a Plan B, C or whatever, but I'll probably not need it.

I've only recently realized I didn't retire to spend my time reading the latest exhalation, publication, or paper from Pfau, Bernstein, Bogle, Burns, Kotklikoff, insert expert name here _____, Mary Poppins, or whatever--and fortunately, I don't have to. I've realized the reason I retired was to get on with my life, beyond the slavery of working, not to obsess over money. Yes, I've optimized my taxes, roth conversions, recharacterizations, tax loss harvesting, asset allocation, and I forget what all else, but as time goes on I intend to continue to simplify and greatly reduce my time on managing my investments.

Worrying about money is just another form of working, and I'm done with that. Retirement from required paid wage slavery has initiated a fantastic new beginning for me. And this party's only just begun.
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Old 01-12-2016, 10:36 AM   #10
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I think in order to be sensible, that you need to use the cost of an inflation adjusted annuity in assessing this annuitization hurdle (particularly at early ages). The problem is that pricing for those are not easy to come by... though I have seen some on Vanguard.
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Old 01-12-2016, 11:26 AM   #11
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Quote:
Originally Posted by pb4uski View Post
I think in order to be sensible, that you need to use the cost of an inflation adjusted annuity in assessing this annuitization hurdle (particularly at early ages). The problem is that pricing for those are not easy to come by... though I have seen some on Vanguard.
Exactly,
My example which is real of a 90 yr old may not be concerned too much with inflation, but a younger 70 yr old should be.

We won't always have 0.7% inflation per year.
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Old 01-12-2016, 11:31 AM   #12
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Quote:
Originally Posted by donheff View Post
Thanks Midpack. That gives a nice quick snapshot of what you can get a straightforward SPIA for. I looked into Vanguard and they pass you to Income Solutions® Home Page which lets you get multiple estimates that include inflation increases for those who like to add those in.
Does not seem to allow me to access anything.
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Old 01-12-2016, 01:09 PM   #13
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Quote:
Originally Posted by pb4uski View Post
I think in order to be sensible, that you need to use the cost of an inflation adjusted annuity in assessing this annuitization hurdle (particularly at early ages). The problem is that pricing for those are not easy to come by... though I have seen some on Vanguard.
That's a good point, and COLA'd SPIA's are becoming increasingly rare (they cost almost double for a 65 year old assuming the sane initial payout). My plot does not include SS, which will be COLA'd, AND I assume full desired income where we could easily get by on a lesser floor income - so I've hedged that way.

But my central point was it might be wise for all of to be conscious of how your nest egg $ compares to the $ cost of an annuity, so you can act on it if you choose to. That's all...

Imagine if you started retirement with 2X the $ needed to buy a COLA'd annuity to cover your floor income, and you wake up one day years later after a market meltdown and find you now have half the $ to buy the same SPIA. Still might not want a SPIA, but I'd like to be conscious of where I stand so I can make a deliberate choice. It takes me 20 seconds each quarter to know...
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Old 01-12-2016, 01:49 PM   #14
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Quote:
Originally Posted by pb4uski View Post
I think in order to be sensible, that you need to use the cost of an inflation adjusted annuity in assessing this annuitization hurdle (particularly at early ages). The problem is that pricing for those are not easy to come by... though I have seen some on Vanguard.
Not worth it. Fidelity (link) gives estimates for annuities with 2% COLA. For a 59yo couple (Joint 100%), given the same lump sum, it takes 10 years before the annual payout of the COLA'd annuity matches initial payout of the SPIA without COLA and another 8 years (18 years total) before matching cumulative payout. The numbers look even worse the younger you are.

Probably better off doing just partial annuitization or annuity ladder.
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Old 01-12-2016, 03:30 PM   #15
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Quote:
Originally Posted by Options View Post
I'm simply not going to have this problem. 8 months into retirement and I realize despite what Mr. Market does now and in the future, I've probably saved too much. This I because I never have been and don't see myself being a high rolling spender. I just don't get the sense of identity or satisfaction out of spending (although I did have about $50K of pent-up spending this last year!). Possible annuitization has always been a Plan B, C or whatever, but I'll probably not need it.

I've only recently realized I didn't retire to spend my time reading the latest exhalation, publication, or paper from Pfau, Bernstein, Bogle, Burns, Kotklikoff, insert expert name here _____, Mary Poppins, or whatever--and fortunately, I don't have to. I've realized the reason I retired was to get on with my life, beyond the slavery of working, not to obsess over money. Yes, I've optimized my taxes, roth conversions, recharacterizations, tax loss harvesting, asset allocation, and I forget what all else, but as time goes on I intend to continue to simplify and greatly reduce my time on managing my investments.

Worrying about money is just another form of working, and I'm done with that. Retirement from required paid wage slavery has initiated a fantastic new beginning for me. And this party's only just begun.
Options, beautifully written. I too have enough stash that I really don't care about running Firecalc every other day, or worry about saving $100 on certain tax situations, or if I have the perfect allocation, or spend hours a day on a frickin' spreadsheet. For God's sake, that is W*rk, perhaps even worse than what I left behind. I've got an allocation, take X% WR and pay whatever taxes I owe. Otherwise, I try not to look at stuff too much. I try to enjoy life, not pennies.
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Old 01-12-2016, 05:52 PM   #16
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My "annuity" provider is 19 Trillion dollars in debt. Should I be worried?
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Old 01-12-2016, 06:26 PM   #17
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Quote:
Originally Posted by pb4uski View Post
I think in order to be sensible, that you need to use the cost of an inflation adjusted annuity in assessing this annuitization hurdle (particularly at early ages). The problem is that pricing for those are not easy to come by... though I have seen some on Vanguard.

Bingo ! U Nailed it ...
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Old 01-12-2016, 10:55 PM   #18
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I haven't done this yet but do plan to start soon. Having an extra data point is somehow comforting to me. I appreciate the links posted to this thread.
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