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Old 03-10-2008, 09:46 AM   #81
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Then all you need is an immediate annuity that pays $50 a year and $8 per week. That'll get you a costco membership and four lbs a week. Might be good enough.
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Old 03-10-2008, 09:57 AM   #82
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So......a bacon SPIA...........
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Old 03-10-2008, 10:11 AM   #83
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Originally Posted by AdventuresAddict View Post

In a nutshell, in my plan, I have:
1) Annuities--survival income
2) Insurance-protection from major financial losses due to LTC, hospitalisation, etc
3) Balanced Portfolio-additional income
4) Basics for Survival Inflation Hedging- in a basket of funds focused on the sectors involved in the basic things I need for survival which may be affected by hyperinflation
5) Gold
6) Cash reserves for emergency

This means that if I want to have $40,000/y, I can't retire when I just have $1m. Probably I'd need more to allocate to the other parts of the plan other than a Balanced Fund.
The general concept here is that an annuity provides more security. But AA seems to be using a non-inflation protected annuity. That doesn't make a lot of sense to me.

I looked at the plan above and said it's roughly stocks plus an annuity.
So I tried FireCalc. I ran it 3 ways:
a) The defaults - $750,000 invested 75/25 stocks/bonds, $30,000 income, 30 years
b) I changed the investments to 100% stocks
c) I kept the 100% stocks, but put $300,000 into an annuity paying a fixed $18,700 per year. I got the $18,700 from Vanguard's site, using a male age 35.

The number of failures in 106 sample retirement years was:
a) 6
b) 8
c) 10

It seems that adding the annuity didn't do a lot of good.

Looking at the detail, (c) outperforms (b) for 1906 and 1929. OTOH, (b) outlasts (c) in 1964, 1970, 1971, and 1972. They both failed for years 1965-69 and 1973.

This isn't very surprising. I believe we had deflation following 1929, so a fixed annuity was a winner. We had high inflation following 70, 71, and 72, so you didn't want a fixed annuity.

Of course, in the 6 cases where they both failed, (c) had some residual income after the assets were depleted. That would be whatever was left of the fixed annuity after 30 years of inflation.

Simply diversifying into bonds, as in (a) seems to do better than either (b) or (c).

I understand that AA intends to over-weight stocks that he thinks are particularly resistant to inflation, and have some gold. However, he doesn't specify how much in either of those categories, or his selling strategy, or what performance he expects from either the gold or those inflation-resistant stocks. So I couldn't do anything with them.
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Old 03-10-2008, 11:26 AM   #84
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Dang it, I knew I should have stayed up later. I wanna know what the unmodified version said!

Did you make note of the veiled "eat me!"?
Lets just say it would not have been conducive to high quality annuity discussion.


Im still not getting why I need an annuity though.
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Old 03-10-2008, 12:20 PM   #85
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I think the short answer is that injecting a reliable income stream - even a modest one - helps portfolio survivability somewhat in some historical cases.

A part time job, a little pension, social security, an annuity...all produce the same result with different costs, risks and associated flotsam and jetsam.

I think the rationale behind buying a non-cpi adjusted annuity is that the payment is so much higher right off the bat. Some folks (Rich?) who are interested in these things are planning to periodically buy small non adjusted annuities when the rates are good, sort of getting some adjustment along the way as opposed to sinking a big sum into one adjusted annuity.

Of course, if your personal inflation rate wanders from the CPI, even by a quarter or half percent, the results of that over 40-50 years might be something bad. Or something good!

I guess if you're planning on living to 120 and feel the need for 100% protection at that age level, at the risk of losing control of your principal should you need it, and to stymie your heirs who must have moved in with a republican to garner such scorn, then its a good plan.

I think i'd take a hard look at the fidelity pseudo annuity funds and the (I suppose eventually) upcoming vanguard managed payout funds first.
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Old 03-10-2008, 12:51 PM   #86
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I guess I would be open to the idea of some sort of COLA'd annuity down the road. Ideally I would like to have my basic living expenses (utilities, food, gas, property taxes, medical premiums) covered by a reliable stream of income. Right now it looks like SS benefits will, in our case, cover most of these basic living expenses and therefore we might not need to buy an annuity at all. But if, down the road, our SS benefits were to be severely reduced, then we might consider a COLA'd annuity as a supplement. At any rate, even if our SS benefits go to $0, we would never invest more than about a 1/3 of our money in annuities.
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Old 03-10-2008, 12:56 PM   #87
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A lot of discussion and historical research have been done to ascertain a Safe Withdrawal Rate. Many experts even recommend that retirees should keep their nest egg in a balanced portfolio of stocks and bonds, and withdraw around 4% pa. This rate is called the swr. I beg to differ. I argue that retirees should have two streams of income: insured stream and uninsured stream.
What do you think?
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For example, I plan to ER at 35, in 5 years.
Always good to be lectured on ER & SWRs by someone who has yet to do either one...
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Old 03-10-2008, 01:27 PM   #88
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I think the short answer is that injecting a reliable income stream - even a modest one - helps portfolio survivability somewhat in some historical cases.
Longevity risk continues to be an issue......

Quote:
I think the rationale behind buying a non-cpi adjusted annuity is that the payment is so much higher right off the bat. Some folks (Rich?) who are interested in these things are planning to periodically buy small non adjusted annuities when the rates are good, sort of getting some adjustment along the way as opposed to sinking a big sum into one adjusted annuity.
That's similar to shopping CDs, though, eventually you'll be in a period where none of the rates are very good..........

Quote:
I guess if you're planning on living to 120 and feel the need for 100% protection at that age level, at the risk of losing control of your principal should you need it, and to stymie your heirs who must have moved in with a republican to garner such scorn, then its a good plan.
Well, the main difference between the folks on here and the average Joe is the ability to control spending and to a lesser extent, expense.

I'll defer to my uncle who just turned 65, who told me: "Gee, the older I get, the more guarantees I want"................
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Old 03-10-2008, 08:03 PM   #89
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Sure, as long as you understand the costs and the implications.

Something I'd consider for diversification purposes, maybe 6th, 7th or 8th on my list.

Except i've only gotten to 4.
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Old 03-11-2008, 01:58 AM   #90
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The general concept here is that an annuity provides more security. But AA seems to be using a non-inflation protected annuity. That doesn't make a lot of sense to me.

I looked at the plan above and said it's roughly stocks plus an annuity.
So I tried FireCalc. I ran it 3 ways:
a) The defaults - $750,000 invested 75/25 stocks/bonds, $30,000 income, 30 years
b) I changed the investments to 100% stocks
c) I kept the 100% stocks, but put $300,000 into an annuity paying a fixed $18,700 per year. I got the $18,700 from Vanguard's site, using a male age 35.

The number of failures in 106 sample retirement years was:
a) 6
b) 8
c) 10

It seems that adding the annuity didn't do a lot of good.

Looking at the detail, (c) outperforms (b) for 1906 and 1929. OTOH, (b) outlasts (c) in 1964, 1970, 1971, and 1972. They both failed for years 1965-69 and 1973.

This isn't very surprising. I believe we had deflation following 1929, so a fixed annuity was a winner. We had high inflation following 70, 71, and 72, so you didn't want a fixed annuity.

Of course, in the 6 cases where they both failed, (c) had some residual income after the assets were depleted. That would be whatever was left of the fixed annuity after 30 years of inflation.

Simply diversifying into bonds, as in (a) seems to do better than either (b) or (c).

I understand that AA intends to over-weight stocks that he thinks are particularly resistant to inflation, and have some gold. However, he doesn't specify how much in either of those categories, or his selling strategy, or what performance he expects from either the gold or those inflation-resistant stocks. So I couldn't do anything with them.
My response is: No, I am not getting a non-inflation-protected annuity. I am getting an immediate variable guaranteed annuity. To describe such an annuity (eg the one I intend to buy in Singapore), it works like this:
1) First, you pay a premium, say $100,000
2) You are guaranteed a minimum monthly pay-out, say $350/m
3) This monthly pay-out can either stay the same or increase over time, but not be decreased. The projected increase is around 2.5% pa, which is well within the long-term inflation rate here (except for the current year which is exceptionally high). For example, in year 1, the pay-out is $350/m. In year 2, it is increased to $360.50/m (3.0% increase). In year 3, the economy may be so bad that the increase is nil (unlikely to be zero, though, even in bad times), and it stays at $360.50/m. In year 4, the economy rebounds strongly, and the increase is 4%, so the monthly pay-out rate increases to $374.92/m. So this $374.92 will therefore become the new guaranteed minimum thereafter.
4) There is a cash value in this annuity, so I can take a policy loan of up to 90% of the cash value during emergency, or surrender the policy for cash.

There may be such annuities in US, UK or Switzerland also. I am not going to name the insurers that offer such policies. You should seek advice from your own planners.

But even an ordinary annuity (eg from Switzerland) that works by paying a guaranteed and a non-guaranteed pay-out (non-escalating, unlike the above-described) can be designed to work in a similar way to offset the inflation. For example, a Swiss annuity may pay a
1) monthly guaranteed of $300/m
2) monthly projected of $50/m
3) additional bonus (eg guaranteed interest of 2% plus projected interest of 0.5%) on any amount of pay-out that you do not withdraw, but leave with the insurer.
For example, you need $250/m now. So, you can leave the projected $50 plus any amount you do not need (eg another $50) in the 'cash account' to earn additional interests. This account can be withdrawn slowly when the inflation has gone (eg 15-20 years later) to the extent that the monthly pay-out (eg $350) cannot cover what you need (eg $360). By then, your 'cash account' may be sizable if you have not touched it, such that the interests generated may be large enough to cover the $10 ($360-$350) or more you need.

The other area that may work towards your advantage (or disadvantage) is the currency strength.

Next, let me move on to explain the 'selling strategy' for the hedging portion (eg gold, energy, property, food chain stocks or index fund) for inflation in basic things for survival. I am not going to speculate in these. I will just leave them there just to hedge. Supposed that the food prices drop (eg due to advances in food producing tech that increase productivity), the food chain index fund (used to hedge against inflation in food) may drop. I am not going to sell these. It doesn't affect my financial health if food prices drop, since my insured stream of income would buy me more food. But if the food prices soar, then the index fund should soar, and this should offset the increased cost of buying food. I can redeem portion of the index fund to offset the increase in food cost.

So how much am I going to set aside for this hedging portfolio? Remember that the purpose of having this is not to speculate, but to offset inflation. So, I keep just enough of index funds for each part of the basic things for survival. For example, I need $100/m for food at present cost (eg of these I break down into $10 for rice; $30 for meat; $10 for water; $5 for seasoning; $20 for vegetables and fruits). I would buy an index fund that hedge into these sub-areas of foods. For example, I may buy $5,000 into stocks of a few Thai farms producing rice (that's where my rice come from). If rice soars to $20/m, that $5,000 stocks may soar to $7,000, $8,000, etc. I can then redeem $120 of these stocks to cover the $120/y increase in rice costs for me, if my annuity income cannot cover the $120/y increase in survival costs due to the inflation in rice.
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Old 03-11-2008, 09:39 AM   #91
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H0cus? Is that you?!?


Always good to be lectured on ER & SWRs by someone who has yet to do either one...
But it's always good to listen to someone who has done it successfully for others, and who has done it for a living.
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Old 03-11-2008, 09:42 AM   #92
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Some observations on some apparently understated risk that is built into your plan:

Regarding the "projected growth" in your annuities (e.g. 2.5% p.a.): I take it that this is not guaranteed. Well, I have a "projected growth" of 4% p.a. in my investments--after inflation. That projection is every bit as solid (or not) as the projection from an insurance company, as most holders f whole life insurance can attest. Even if an insurance company were to offer a "guarantee," it would all still be predicated on the soundness of the company--over a 50 year span. That's a lot to take on faith.

Regarding your hedging on the costs of survival items: Your underlying assumption is that whatever drives up the price of these items will also drive up the profits of the companies that deal in them. Not so. If, for example, Thailand has an epiphytotic of the rice blast bacteria, it could wipe out a large portion of the rice crop there. This would drive local rice prices up. I don't think that your local rice farmers, wading through the muck to salvage a few unaffected rice grains, are going to see a big jump in the value of the shares of their company. There are many cases when a commodity skyrockets in price but the companies/stock price of the companies dealing in it do not benefit significantly. You'd have t pick the right spot in the supply chain to benefit from the price jump, and buying stocks across the entire supply chain might not net any profit at all (e.g. if rice doubles in retail price because of a shortage, but there is far less rice sold overall as a result, lots of companies in the supply chain would be hurting and suffer a drop in stock price for the few who are winners--if you own everything, you should expect to about break even)
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Old 03-11-2008, 10:20 AM   #93
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Interesting stuff.

Re the Singapore annuity: In the US, some companies offer annuities with guaranteed annual increases at a pre-determined percent. (Vanguard calls this a "graded payment option".) Or, you can buy a variable annuity with a "Guaranteed Lifetime Withdrawal Benefit" that sounds a little more like your description. In the GLWB case, the upward ratchets are entirely driven by the performance of your funds, the insurance company doesn't have any discretion.

For the Singapore annuity, are the increases driven by some index or formula? or are they at the discretion of the insurance company?

The Swiss annuity sounds like something we used to call a "participating" annuity. There was a guaranteed payout plus a "dividend" that was illustrated at time of purchase but not guaranteed. If you wanted to leave the dividend portion with the company, they set up a "dividend accumulation" account and paid a guaranteed interest rate plus (potentially) an additional rate. I doubt that they are easy to find in the US these days. The US market doesn't like anything that gives some future management team any discretion regarding your income.

Of course, in the US you can buy an immediate life annuity that has a contractual CPI adjustment. That takes all the discretion away from the insurer. You still have the risk that your personal price index doesn't match the government's. You can probably guess that is the format I would want if I were buying an immediate annuity. Presumably, there is no such animal in Singapore.

The commodity side is also interesting. We may have different meanings for "index fund". I think of that as a basket of stocks that some mutual fund company has chosen to match some high visibility index (e.g. S&P 500). You seem to be using it as "a fund of money that I invest in specific stocks that I expect to track with some segment of my expenses".

I'm intrigued by the notion that you can buy stock in Thai rice farms. I don't know how I would do that in the US, though their may be REITS that invest in farmland, or, maybe you could chain futures.

I'll point out, as a theoretical warning, that if the price of food goes up because demand outruns supply, owning a piece of a farm is a hedge. If the price of food goes up because the cost of inputs goes up, than owning the farm doesn't work so well.
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Old 03-11-2008, 11:23 AM   #94
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But it's always good to listen to someone who has done it successfully for others, and who has done it for a living.

Ya what bad could happen by having a financial adviser...
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Old 03-11-2008, 11:40 AM   #95
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Interesting stuff.

Re the Singapore annuity: In the US, some companies offer annuities with guaranteed annual increases at a pre-determined percent. (Vanguard calls this a "graded payment option".) Or, you can buy a variable annuity with a "Guaranteed Lifetime Withdrawal Benefit" that sounds a little more like your description. In the GLWB case, the upward ratchets are entirely driven by the performance of your funds, the insurance company doesn't have any discretion.
Here's how I break it down in the USA:

1)SPIA: I have access to over 20 companies that offer this. And yes, I can choose between giving a client a 3, 4, 5 or 6% INCREASE each year, however since it is actuarially based, they just get a smaller payment to begin with the more "COLA" they want.........no rocket science there..........

2)VA with living benefit rider: The newer versions offer a guaranteed growth of an "income base" from which a client can take income now or later, and that "income base" is credited between 5% and 7% a year depending on the company. Some compound the rate, some don't. Here's a hypothetical example:

You make a $100,000 investment in this. We'll say you don't need the monny right away. Using a 7% income base rider, you will in effect double that income base in a little less than 10 years, so you have $200,000. At the minimum, you can withdraw $10,000 a year for life if you are under 75, 6% if you are age 76-80, and 7% if you are 80 or older, regardless of if the funds don't do 7% or better over that 10 year period. Companies do a "rachet" on an annual, quarterly,or daily basis. The only discretion they have is WHEN the potential rachet occurs............

The downside is the contracts are not cheap, typically 2.50-3.0% a year, and you can't just walk away with the $200,000 if the market is down, you can only take it as an income stream. In addition, you are betting that the insurance company is allocating enough money to pay their future promises on these income streams...........
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Old 03-11-2008, 01:56 PM   #96
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Some observations on some apparently understated risk that is built into your plan:

Regarding the "projected growth" in your annuities (e.g. 2.5% p.a.): I take it that this is not guaranteed. Well, I have a "projected growth" of 4% p.a. in my investments--after inflation. That projection is every bit as solid (or not) as the projection from an insurance company, as most holders f whole life insurance can attest. Even if an insurance company were to offer a "guarantee," it would all still be predicated on the soundness of the company--over a 50 year span. That's a lot to take on faith.

Regarding your hedging on the costs of survival items: Your underlying assumption is that whatever drives up the price of these items will also drive up the profits of the companies that deal in them. Not so. If, for example, Thailand has an epiphytotic of the rice blast bacteria, it could wipe out a large portion of the rice crop there. This would drive local rice prices up. I don't think that your local rice farmers, wading through the muck to salvage a few unaffected rice grains, are going to see a big jump in the value of the shares of their company. There are many cases when a commodity skyrockets in price but the companies/stock price of the companies dealing in it do not benefit significantly. You'd have t pick the right spot in the supply chain to benefit from the price jump, and buying stocks across the entire supply chain might not net any profit at all (e.g. if rice doubles in retail price because of a shortage, but there is far less rice sold overall as a result, lots of companies in the supply chain would be hurting and suffer a drop in stock price for the few who are winners--if you own everything, you should expect to about break even)
Ok, gd that u brought up these 2 points. To reply,
1) The reason why the annuity is taken up in the 1st place is not to have the highest possible projected returns, but to have an insured stream of income + some counter-inflation features to preserve this insured stream's purchasing power.

In other words, you can't have the best of both worlds in one product. But as I said annuities in my case are used just to insure a survival income source. Having the 2.5% projected increase is a bonus to counter inflation which has been around 2% or less here (due largely to the strengths of Singapore's fiscal policy, status as financial center and currency) except for the present worldwide inflationary period.

On top of the annuities, I had listed other products in my portfolio to do the part of increasing the projected returns (eg balanced portfolio of stocks and bonds).

Every part of a comprehensive retirement plan has its function and limitations.

2) No, it's never my assumption that when prices of certain products go up, those companies producing them would rise in value. But in the case of the Thai rice, the Thai farms are a good hedge. Supposed that the farms produce a certain amount of rice a year (eg 1,000 tons) at a fixed costs of $0.50/kg. If the worldwide commodity price of rice is $1/kg, then the profit would be $0.50. But if it rises to $2, the profit would be $1.50 (300%). As such, the stocks would probably rise.

This principle is applicable to things like gold mine also. But since gold can be easily stored for decades, a better way to directly hedge against the rise in gold price would be to keep gold bars themselves, instead of buying into the mines that produce them. But in the case of hedging against rice price (the example I gave), we can't buy 1,000 kg of rice or so (eg which we consume in a lifetime!) to hedge against the inflation. The storage cost is one thing, and whether the quality of the rice can be preserved over decades is another! As such, a better hedge would be to buy into the farms producing the rice! Of course, there might be exceptions: the farms' stocks may not rise even when their rice becomes more expensive. The particular farms you buy into may be affected by flood; there is a financial scandal; because of fear stocks fall across the market........But generally speaking, the stocks of these farms should rise when their produce become more valuable and there's no drastic changes to their costs. It's not a 100% foolproof hedge, but it's some hedge.

I'd like to comment that among others, one of the most difficult costs to hedge is healthcare costs for retirees. We can't expect the pharm and nursing companies to rise in value even when the costs of drugs and nursing services become more expensive. This is a classical example of what can go wrong when one makes this wrong assumption which you highlighted. For example, drugs manufacturers may still lose money because 99% of their r&d don't materialize into patented, commercialized drugs. They may raise the price of their patented, commercialized drugs by 100%, but be still making losses year after year. So, it'd be naive to think that buying into these companies can effectively hedge against healthcare inflation. So hedging against healthcare inflation is totally different as hedging against food inflation.
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Old 03-11-2008, 03:03 PM   #97
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I think I'd rather build a portfolio of high quality dividend stocks and trust that their dividend increases will protect me from inflation. Looking around, you can get about a 4% overall yield in large cap us stocks if you focus on yield.

How's this for a sample portfolio:

MO, GE, USB, WFC, O, DUK, BUD, PFE, MCD, JNJ, KO, DOW

That's got to have pretty close to a 4% yield, and I bet that the dividends as a group will increase at above inflation.

There are a few weak links in the portfolio (PFE, DUK, and O may be stretching for yield), but I would rather have my retirement depend on them than on the competence and integrity of one insurance company.

Maybe if Berkshire sold immediate annuities.


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Here's how I break it down in the USA:

1)SPIA: I have access to over 20 companies that offer this. And yes, I can choose between giving a client a 3, 4, 5 or 6% INCREASE each year, however since it is actuarially based, they just get a smaller payment to begin with the more "COLA" they want.........no rocket science there..........

2)VA with living benefit rider: The newer versions offer a guaranteed growth of an "income base" from which a client can take income now or later, and that "income base" is credited between 5% and 7% a year depending on the company. Some compound the rate, some don't. Here's a hypothetical example:

You make a $100,000 investment in this. We'll say you don't need the monny right away. Using a 7% income base rider, you will in effect double that income base in a little less than 10 years, so you have $200,000. At the minimum, you can withdraw $10,000 a year for life if you are under 75, 6% if you are age 76-80, and 7% if you are 80 or older, regardless of if the funds don't do 7% or better over that 10 year period. Companies do a "rachet" on an annual, quarterly,or daily basis. The only discretion they have is WHEN the potential rachet occurs............

The downside is the contracts are not cheap, typically 2.50-3.0% a year, and you can't just walk away with the $200,000 if the market is down, you can only take it as an income stream. In addition, you are betting that the insurance company is allocating enough money to pay their future promises on these income streams...........
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Old 03-11-2008, 03:05 PM   #98
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Maybe if Berkshire sold immediate annuities.
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Old 03-11-2008, 03:12 PM   #99
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Maybe if Berkshire sold immediate annuities.
They do Berkshire Hathaway Group. But they're only for non-qualified money - i.e. no 401(k) or 403(b) money.

fyi - TIAA still has the participating immediate annuity for people that are eligible [non-profits].
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Old 03-11-2008, 03:31 PM   #100
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So if I were 55 and retiring, it looks like I could get $533/month for each 100k, giving me an immediate withdrawl rate of about 6.4%.

If I were 65 and retiring, it looks like I could get close to 7.6%.

I guess that as you get older, it may be worth looking at annuities to counteract longevity risk, perhaps reducing any long-term bonds in your portfolio by the amount of your annuity holdings.

These are going to have the same vulnerability to inflation that long-term bonds have of course.

Since I own no bonds at 35, I suppose replacing them with annuties might be ok

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