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Old 03-04-2015, 10:05 AM   #21
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I think the 4% you are referring to is the "Safe Withdrawal Rate". Pfau's paper actually concluded that non-COLA'd SPIAs won out over bonds and even COLAed annuities because the COLAed annuities were over priced.

My recent annuity buy is a little special. It's not a commercial annuity it's buying into a state, COLAed, DB pension plan. It gives me a 7% withdrawal at age 55 which is a full 3% more than the 4% I'd be advised to take from the money if I was managing it myself.
I would say you're SPIA is special. I have seen a number of these pension buy ins that looked very good. The consumer ones really look pretty bad to me at these interest rates... as you noted... where do we expect rates to go.
I looked back a Wade's paper.. quote below. I guess his conclusion is to buy a real FIA for longevity, but then notes (since this does not likely fun inheritance/estate plans) that your FA needs to help you adjust your plan "ok.. my interpretation".

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The second question asked was: “Is it in the retiree’s best interest to fully mitigate against the four inflation-adjusted
retirement income risks?” This answer demands the retirement planner to use both the science and the art of sustainable
inflation-adjusted retirement planning to resolve the income conundrum confronting retiring baby boomers. Observing Pfau’s
analysis in Exhibit H and I, one can observe that a retiree may potentially align his retirement income to successfully mitigate
against the four major risks of sustainable inflation-adjusted retirement income through investing 100% of his retirement
assets into a state-of-the-art real FIA. This is the science
After being sold an annuity in my 20's and having my portfolio churned, I'm real skeptical of the whole financial industry.
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Old 03-04-2015, 10:38 AM   #22
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After being sold an annuity in my 20's and having my portfolio churned, I'm real skeptical of the whole financial industry.
Skepticism is good armour. Buying a variable or deferred annuity at that age is probably not the best move, too much complication and expense. Being a skeptic you should look at what you are buying and do it for the right reasons, not because someone says its a good move. In the late 1980s I contributed to a TIAA fixed deferred annuity not knowing anything about investing and I was lucky that at least I bought from a respectable company and fell into one of the "good" deferred fixed annuities with low fees; it's averaged 6% annual return since then and kept pace with my other fixed income with a lot less risk, but I was very lucky.

I'd avoid annuities unless you are retiring and want to insure for longevity or produce income and then I'd only annuitize up to 20% of my portfolio. The one exception would be TIAA-CREF as their retirement products are basically all structured as annuities for historical reasons. But they don't really act like annuities at all except for TIAA-Traditional and that's still a very particular product.

If you can derive your retirement income from guaranteed sources like pensions, SS, SPIAs then I'd feel far better about a rising glide path. It would take more guts than I have to go on a rising glide path where I was relying on 4% withdrawals from a portfolio totally exposed to stock and bond market fluctuations. I'd probably follow Bogle's advice to keep the percentage of fixed income equal to my age.
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Old 03-04-2015, 11:55 AM   #23
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It looks like new assumptions are changing the recent view on equity glide paths.

To Rise or Not To Rise: Stock Allocation During Retirement
I'm one year into ER and just took a step up in my equity percentage from 50% to 70% because I used stable value and some total bond index to buy an annuity, not much gliding, more of a leap to more equities. If I can now get 1% greater return on my remaining portfolio (6% rather than 5%) because I have a higher percentage of equities my spreadsheet shows the annuity with higher equites percentage portfolio overtaking the 50/50 portfolio at age 64, that's 10 years from now. My gut says I'm not taking on much more risk as I have basically swapped cash and bonds for the annuity....in fact do I have less risk?
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Old 03-04-2015, 12:03 PM   #24
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Well... I moved it over to a less costly annuity later. never really looked at the return ... looks like just under 8%. But most of the time was after conversion to less expensive custodian.

ER @ 53... expected WR 1.5%. I can tighten up in bad years easily to 1%... but in good years my take it higher (... "what else am I going to do with it"). I expect I should be fine with a 50/50.. 60/40...and probable would work with just cash.... but don't think that would be good.

When we get to SS (assuming taken @ 70 and similar to today).. We should easily be able to live on that. But it is nice to have options.
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Old 03-04-2015, 12:22 PM   #25
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Well... I moved it over to a less costly annuity later. never really looked at the return ... looks like just under 8%. But most of the time was after conversion to less expensive custodian.

ER @ 53... expected WR 1.5%. I can tighten up in bad years easily to 1%... but in good years my take it higher (... "what else am I going to do with it"). I expect I should be fine with a 50/50.. 60/40...and probable would work with just cash.... but don't think that would be good.

When we get to SS (assuming taken @ 70 and similar to today).. We should easily be able to live on that. But it is nice to have options.
That's close to my scenario. The pension buy in was a convenient way to produce income and get some longevity insurance. I was dubious about it as I have enough to fund my retirement without any issues, but if it also allows me to have a higher equity allocation and offers the chance to have a higher portfolio value by age 64 and the pension income too its sort of a slam dunk.....of course the issue with rising glide paths is also rising risk so the change of higher portfolio values must be tempered by increasing possibilities of failure.
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Old 03-04-2015, 02:11 PM   #26
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He says historical data is not much help when there are high stock market valuations and low interest rates. But stay tuned for his next update.

I believe your AA should reflect your situation and should be adjusted as circumstances warrant.

For example, if you retired 5 years ago with a 60/40 allocation, you probably have some very nice choices to make now. 1) your time frame is now five years shorter; 2) you have enjoyed excellent returns and have more assets. Now, it seems that you could choose 1) leave allocation 60/40, plan on leaving bigger legacy or spend more; or 2) reduce your risk, switching to something like 40/60 and still have same acceptable living standard.

AA should not be set and forget, it should be adjusted to your own situation. Although "glide path" sounds very impressive, and the idea of protecting oneself during your early years is appealing, you still need to pay some attention.


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Old 03-05-2015, 03:17 AM   #27
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i agree. i have always been an investor who adjusts to the bigger picture and my changing goals.

this is my first year retiring when i start in july.

right now i am running a 50/50 mix but that can change .

if bond rates rise and no longer make it worth staying their are much better places to invest the fixed income side.

high stock valuations and low rates are an uncharted territory in retirement so counting on past results may not be the best thing.

don't be surprised if the new popular allocation is equities and mostly cash . or spia's and equities .
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Old 03-05-2015, 09:44 AM   #28
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Sorry, that's not sophisticated enough. You need to run it through a bevy of calculators using statistical regression analysis along with future assumptions based on historical Monte Carlo algorithms modified by analytic recursive analysis of the mean differentiation integral of the standard deviation mode based on the last 78 years of market backward trailing averages.
That's what I do.
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Old 03-05-2015, 10:28 AM   #29
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He says historical data is not much help when there are high stock market valuations and low interest rates. But stay tuned for his next update.

I believe your AA should reflect your situation and should be adjusted as circumstances warrant.

For example, if you retired 5 years ago with a 60/40 allocation, you probably have some very nice choices to make now. 1) your time frame is now five years shorter; 2) you have enjoyed excellent returns and have more assets. Now, it seems that you could choose 1) leave allocation 60/40, plan on leaving bigger legacy or spend more; or 2) reduce your risk, switching to something like 40/60 and still have same acceptable living standard.

AA should not be set and forget, it should be adjusted to your own situation. Although "glide path" sounds very impressive, and the idea of protecting oneself during your early years is appealing, you still need to pay some attention.


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Or start retirement with a 50/40/10 (stocks/bonds/cash) allocation, ignore the noise, stay the course and enjoy retirement.

That's what I did......
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Old 03-05-2015, 10:35 AM   #30
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Or start retirement with a 50/40/10 (stocks/bonds/cash) allocation, ignore the noise and stay the course.

That's what I did......
A perfectly valid approach, but when SS starts would you let your equity percentage drift up as you won't need quite as much buffer, and if you have income covered by guaranteed sources should your AA be 100/0?
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Old 03-05-2015, 10:48 AM   #31
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A perfectly valid approach, but when SS starts would you let your equity percentage drift up as you won't need quite as much buffer, and if you have income covered by guaranteed sources should your AA be 100/0?
Not really. All of my plans using Fido RIP, Firecalc, FRP, Quicken etc were based on this allocation for the duration even when SS starts. The end of plan balance would be more than enough to supplement my heirs portfolios.
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Old 03-05-2015, 11:14 AM   #32
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A perfectly valid approach, but when SS starts would you let your equity percentage drift up as you won't need quite as much buffer, and if you have income covered by guaranteed sources should your AA be 100/0?
I think that depends on your goals. If you are trying to maximize your portfolio to pass onto your heirs after you are gone, perhaps. But if that's not the major consideration, then maybe not. We hope to do plenty of gifting while we are still alive and are less concerned about maximizing the portfolio "terminal value".
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Old 03-05-2015, 11:36 AM   #33
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Same here - maximizing end value is not what I'm looking for, it's just sustainable income over time. But it's all in what your goals for your heirs or charities are, I guess, because once you've passed the minimum with a comfortable margin for crashes etc. there's not a whole lot of reasons to worry about the pile of money you end with afterwards.
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Old 03-05-2015, 12:07 PM   #34
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I think that depends on your goals. If you are trying to maximize your portfolio to pass onto your heirs after you are gone, perhaps. But if that's not the major consideration, then maybe not. We hope to do plenty of gifting while we are still alive and are less concerned about maximizing the portfolio "terminal value".
If you have income covered from guaranteed sources what goal would you have other than maximizing the size of your portfolio. Think of those fixed sources as your cash/bond allocation.....the rest of the portfolio is equities.......so why wouldn't you just own 100% equities if you get enough money to live on from SPIA, pension, rent etc.
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Old 03-05-2015, 12:44 PM   #35
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If you have income covered from guaranteed sources what goal would you have other than maximizing the size of your portfolio. Think of those fixed sources as your cash/bond allocation.....the rest of the portfolio is equities.......so why wouldn't you just own 100% equities if you get enough money to live on from SPIA, pension, rent etc.
I might decide to upgrade my lifestyle instead and spend (including gifting) more while I'm alive.

Note that spending doesn't only mean spending on yourself. It can (and does in our case) mean gifting to heirs and gifting to charities. We really like being able do that while we are living. Heir age too. Charities can always use some money today.

We intend to spend as much as our portfolio will bear while we are alive, rather than maximize the terminal value. For this reason we prefer to have a less volatile portfolio, but one that still should keep with inflation and has good survival characteristics.
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Old 03-05-2015, 12:44 PM   #36
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I can see a good case for a "goodies" investment allocation if the "minimum" has been taken care of. If the portfolio does well, it's a big trip to Europe that year. If it does less well, it may be a few days in Vegas or some close-to-home getaways for a week or so. Once the "gotta have" money is inthe bag (including future inflation possibilities), a highly variable "fun money" portfolio would be acceptable for us.

IIRC, there's considerable bang-for-the-buck for having a small allocation (10-15%) to ST bonds rather than going 100% equities. The drag is minimal and it may even have higher long-term return.
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Old 03-05-2015, 12:59 PM   #37
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If you have income covered from guaranteed sources what goal would you have other than maximizing the size of your portfolio. Think of those fixed sources as your cash/bond allocation.....the rest of the portfolio is equities.......so why wouldn't you just own 100% equities if you get enough money to live on from SPIA, pension, rent etc.
The average expected outcome for a 100% equities portfolio is lower than a more diversified portfolio. You can verify this by playing with your favorite retirement calculator. Or google "efficient frontier" for the theoretical explanation.

This bring me to one of my favorite rants: the way people greatly overestimate their intuition about the statistics of investing. Even people who deal with this every day make mistakes about probability (google "monty hall problem"). That's why I generally run screaming from anyone who insists on the reliability of their gut investing instinct.
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Old 03-05-2015, 01:15 PM   #38
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This bring me to one of my favorite rants: the way people greatly overestimate their intuition about the statistics of investing. Even people who deal with this every day make mistakes about probability (google "monty hall problem"). That's why I generally run screaming from anyone who insists on the reliability of their gut investing instinct.
I was looking at the wikipedia article for the monty hall problem a few weeks ago and I was surprised to find that even Paul Erdos got it wrong.
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Old 03-05-2015, 01:28 PM   #39
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In terms of portfolio survival, if you are withdrawing from it, I don't think you want more than 80% stocks, or even 75%, maybe.

But if you are just letting the money run for your heirs and not drawing on it, 100% stocks still beats over long periods of time. You can argue whether the risk adjusted return is worth it.

Over very long periods of time, various portfolio allocation performance will usually look something like this.


But any given decade you might underperform with 100% stocks. You'll also underperform with 80% stocks.
from https://dougcronk.wordpress.com/2010...040-asset-mix/
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Old 03-05-2015, 01:33 PM   #40
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If you have income covered from guaranteed sources what goal would you have other than maximizing the size of your portfolio. Think of those fixed sources as your cash/bond allocation.....the rest of the portfolio is equities.......so why wouldn't you just own 100% equities if you get enough money to live on from SPIA, pension, rent etc.

I should be one of those types since my pension is considerably more than my monthly expenses. But I just could never commit to pure equities. Instead I have compromised by moving a big chunk of my cds and IBonds to preferred stock. Flys a bit into conventional practice, but I can handle drops in prices knowing I am collecting safe 6-7.5% yields on dividends. If they would ever drop from market forces in half, well I will double down and purchase more at get those at 14% then. In fact, I hope they do as I intend to reinvest all the dividends and continue buying more.


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