Insured & Uninsured Income Streams: Combination to ensure security for retirement

[REWahoo]

Quote:

Originally Posted by Dawg52 Just curious, why did you get out of Wellesley?

I didn't understand unclemic's post as saying he'd gotten out of Wellesley, rather that he'd forgotten to mention it in his prior post. Of course my Sony Greenspan Translation Tricorder is only a 2005 model and isn't always 100% accurate in decoding unclemic, but it's better than nothing...

[Delawaredave5]

Quote:

Originally Posted by AdventuresAddict I am a financial planner by training

Please go spam other boards.

[unclemick]

Quote:

Originally Posted by Dawg52 Just curious, why did you get out of Wellesley?

Religious conversion - I read Bogle's first book circa 1994 convinced my oldest nephew out of the Naval academy to read the book/do the TSP version of indexing. (Index 500 type fund).

Then I realized/suffered an epiphany that my 7-8 slice and dice Vanguard funds(big chunk of Wellesley) could be combined into the new LifeStrategy funds and I could dodge the emotion(that you are not supposed to have) of rebalancing. Without calculating too close - hindsight handgrenade wise said my track record going back to 1966 was less than stellar being a posterboy for every investment mistake in the book except perhaps commodities.

Thus an indexer/auto rebalancer via balanced index. Still you can't quell all the hormones - bought widow and orphan dividend stocks(many from Wellesley's top ten) on the side.

heh heh heh - so after I convinced the nephew, my sales pitch convinced myself - became a born again Boglehead with lapses into sin - a few good stocks.

Then coming up on 2006 I convinced a female friend to go Target Retirement 2015. After I convinced her - convinced myself and went even more full auto 2015 for me. I had slipped over the years 1995 - 2005, by adding in VG REIT Index, Sm Cap Value. Bernstein's pesky value premium influence again. I rebaptized myself with 2015. Let's hope all my future sin is confined to individual stocks and kept under control. .

[W2R]

Quote:

Originally Posted by unclemick Religious conversion - I read Bogle's first book circa 1994 convinced my oldest nephew out of the Naval academy to read the book/do the TSP version of indexing. (Index 500 type fund). Then I realized/suffered an epiphany that my 7-8 slice and dice Vanguard funds(big chunk of Wellesley) could be combined into the new LifeStrategy funds and I could dodge the emotion(that you are not supposed to have) of rebalancing. Without calculating too close - hindsight handgrenade wise said my track record going back to 1966 was less than stellar being a posterboy for every investment mistake in the book except perhaps commodities. Thus an indexer/auto rebalancer via balanced index. Still you can't quell all the hormones - bought widow and orphan dividend stocks(many from Wellesley's top ten) on the side. heh heh heh - so after I convinced the nephew, my sales pitch convinced myself - became a born again Boglehead with lapses into sin - a few good stocks. Then coming up on 2006 I convinced a female friend to go Target Retirement 2015. After I convinced her - convinced myself and went even more full auto 2015 for me. I had slipped over the years 1995 - 2005, by adding in VG REIT Index, Sm Cap Value. Bernstein's pesky value premium influence again. I rebaptized myself with 2015. Let's hope all my future sin is confined to individual stocks and kept under control. .

I'm glad to read that your reasons for selling Wellesley were (I guess?) pretty much that you wanted everything in 2015 so that you didn't have to rebalance any more, and not that your move was due to something wrong with Wellesley. I bought what to me is a huge chunk of Wellesley within the past month.

So far, so good and I like the way it doesn't move as drastically as the all equity funds. Definitely a sleep aid.

[Ed_The_Gypsy]

Assertion: Annuities!!!
Rebuttal: Baldwin United. Reading and Bates.

[AdventuresAddict]

To reply:
1) why am I here? Just to learn and discuss, just like all of you guys. I am planning for my early retirement now also. Not to sell to anyone. As most of you guys are Americans, and few if any would be Singaporeans like I, this would be the wrong place to do e-marketing! Haha.
2) Regarding the DIY preference. I think I had explained why from a retirement planning perspective, sometimes we need to transfer the risk to a financial institution in areas where the risk is undesired. As a retiree, you wouldn't want the risks of running out of monthly income as much as you wouldn't want to be down with long-term care, hospitalization, etc uninsured. As such, I argue that the survival income portion of your planned income stream should be an insured source. The principle is the same as why you'd--even as a retiree---want to buy long-term care and medical insurance. It's for risk transfer because you do not want to self-insure this risk. It's even more important, in my view, if your nest egg is not big, because a major slide in the financial market could reduce your capital significantly. As George Soros says, the situation today is totally different. The financial system and economic order have totally changed today, with financial derivatives (such as CDO) spreading like epidemic. You don't have to agree with me. But in a forum like this, everyone is here to share his ideas. My point is that you should seek more protection for your survival income stream since the volatility is much higher today than it was decades back, from which data supporting the SWR research is derived.

[AdventuresAddict]

Quote:

Originally Posted by Delawaredave5 Please go spam other boards.

Do financial planners always have to be spammers? Can't they discuss like everyone else? It's as discriminatory as saying blacks shouldn't run for Presidency.

[Khan]

Quote:

Originally Posted by AdventuresAddict Do financial planners always have to be spammers? Can't they discuss like everyone else? It's as discriminatory as saying blacks shouldn't run for Presidency.

Playing the persecution card: a definite strike.

[Notmuchlonger]

Welp didnt take long for the genderraceethnic woe is me card to be played.

[growing_older]

Seems earnest and sincere enough. I didn't get "persecution card" from that comment as much as attempt at analogy across cultures and maybe languages. Besides it's an interesting topic.

If you do think of dividing your resources to split off some kind of "survival" component which you are looking for greater assurance will be there, why would you trust an insurance company more than widely diversified financial instruments of your own choosing? Insurance companies do go bust and are exposed to the possibility of insider manipulation, criminal activity or just plain management incompetence. And they are dependent on the same market forces that I am dependent on as an individual investor. Not sure I see where that is any more secure than some nice index funds and good asset allocation. Short of trearuries (inflation risk) or TIPS (other complicated risks if that's all you held) I don't see any "guarantees" out there. I don't see the advantage.

[Hamlet]

All right, I'll feed the troll

My problem with the vast majority of annuities is that you give up an amazing amount of money to shift that risk to the insurance company, and in the end you've only changed the risk, not eliminated it.

If your portfolio under performs to the degree that it would have run out by withdrawing 4% a year, isn't that insurance company very likely to be insolvent? The insurance company is buying investments in the same stock and bond markets that we are-- if they massively under perform for a decade, the insurance company is just as likely to run into financial problems as we are. Actually, probably more likely, given the way a lot of them are run

I'd rather trust my future to a diversified portfolio of top businesses than to one insurance company, no matter how well run.

Quote:

Originally Posted by AdventuresAddict To reply: 1) why am I here? Just to learn and discuss, just like all of you guys. I am planning for my early retirement now also. Not to sell to anyone. As most of you guys are Americans, and few if any would be Singaporeans like I, this would be the wrong place to do e-marketing! Haha. 2) Regarding the DIY preference. I think I had explained why from a retirement planning perspective, sometimes we need to transfer the risk to a financial institution in areas where the risk is undesired. As a retiree, you wouldn't want the risks of running out of monthly income as much as you wouldn't want to be down with long-term care, hospitalization, etc uninsured. As such, I argue that the survival income portion of your planned income stream should be an insured source. The principle is the same as why you'd--even as a retiree---want to buy long-term care and medical insurance. It's for risk transfer because you do not want to self-insure this risk. It's even more important, in my view, if your nest egg is not big, because a major slide in the financial market could reduce your capital significantly. As George Soros says, the situation today is totally different. The financial system and economic order have totally changed today, with financial derivatives (such as CDO) spreading like epidemic. You don't have to agree with me. But in a forum like this, everyone is here to share his ideas. My point is that you should seek more protection for your survival income stream since the volatility is much higher today than it was decades back, from which data supporting the SWR research is derived.

[Gotadimple]

You know, you guys need to get your hormones in check. Seriously.

The individual has stated he is here to learn and to discuss retirement strategies. Rather than attack, might you try to listen to what is being offered. OP has asked AdventuresAddict to post his financial advisor bone fides. Why? He is here as a participant -- as he stated.

Moderators, I am asking if this can't be controlled within this string, that the topic be closed quickly.

--Rita

[Independent]

Quote:

Originally Posted by Hamlet All right, I'll feed the troll My problem with the vast majority of annuities is that you give up an amazing amount of money to shift that risk to the insurance company, and in the end you've only changed the risk, not eliminated it. If your portfolio under performs to the degree that it would have run out by withdrawing 4% a year, isn't that insurance company very likely to be insolvent? The insurance company is buying investments in the same stock and bond markets that we are-- if they massively under perform for a decade, the insurance company is just as likely to run into financial problems as we are. Actually, probably more likely, given the way a lot of them are run I'd rather trust my future to a diversified portfolio of top businesses than to one insurance company, no matter how well run.

You seem to be assuming that the only plausible reason to buy an annuity is to reduce investment risk. If that were true, you'd be right.

But an annuity provides longevity insurance. In fact, in a payout variable annuity, you keep the investment risk/reward and only transfer the mortality risk.

Having said that, I'll hasten to add that deferring SS (as we've all debated at length) seems like a better way to "buy and annuity" than to buy one from a private insurer.

I'll agree with AA that people with lower assets are more likely to need insurance than people with higher assets (for example, a low asset person has more reason than a person with high assets to buy collision insurance on a $10,000 car).

[haha]

Quote:

Originally Posted by Hamlet My problem with the vast majority of annuities is that you give up an amazing amount of money to shift that risk to the insurance company, and in the end you've only changed the risk, not eliminated it. If your portfolio under performs to the degree that it would have run out by withdrawing 4% a year, isn't that insurance company very likely to be insolvent? The insurance company is buying investments in the same stock and bond markets that we are-- if they massively under perform for a decade, the insurance company is just as likely to run into financial problems as we are.

This is likely not true. For one, only a minority of insurance companies and possibly no life companies buy much in the way of stocks. They don't seem to share our touching faith in stocks as the antidote to inflation, and they have capital surplus rules to contend with.

Regulation is state by state but there will also be pools to at least partially protect policy holders in the event of insolvancy.

Lastly, as another poster mentioned above, longevity risk is the main risk being insured against when one buys an annuity. All allocation strategies that use stocks, and any liquidating TIPS strategy is vulnerable to being outlived.

Personally I don't worry much about living too long; my main concern is not living long enough. But I know that this is a concern to many others.

Ha

[stephenandrew]

I am certainly no expert, but I have come to rely on Jonathan Clement's weekly "Getting Going" column in the Wall Street Journal as bineg a fiar and unbiased source of finacial guidance. He has always been a proponent of using ome of your retirement nest egg as a means of helping to insure adequate income throughout retirment. Below is an excerpt from an article he published in November of 2005:

************************************************** *****
"That's a shame, because immediate-fixed annuities -- which can provide lifetime income in exchange for a lump-sum investment -- are possibly retirees' best bet for squeezing maximum income out of their retirement savings. What to do? One solution: Buy income annuities -- but buy them on the installment plan.
• Locking up income. Even without the fear factor, income annuities are a tough sell, thanks to the rotten reputation of tax-deferred variable annuities, the often-costly retirement-savings vehicles. This is a tad unfair, because immediate-fixed annuities are really a totally different animal.


In fact, buying an income annuity is more like buying high-quality bonds, but with a few key differences. An income annuity typically doesn't have any principal value, like a bond does. But the payout should be significantly higher -- and you can elect to get that income for life, thus locking up an income stream you can't outlive.
Sound appealing? If you are in poor health, an income annuity would be a lousy investment. But if your health is good, stashing maybe half your nest egg in an annuity could be a smart move.
************************************************** ****
I am not saying that the original poster is correct, nor am I saying Mr Clements is correct, but it would appear to me that the advice given is not far fetched. I certainly would not put all of my wealth into an annuity upon retirmement, but could see possibly putting some of it into an annuity to provide an additioanl leel of diversification/income insurance. Just becasue someone says they are a salesman, doesn;t mean they are trying to sell you something. I pesonally think this is a topic that merits some discussion--I know I could learn something.

[stephenandrew]

Quote:

Originally Posted by stephenandrew I am certainly no expert, but I have come to rely on Jonathan Clement's weekly "Getting Going" column in the Wall Street Journal as being a fair and unbiased source of finacial guidance. He has always been a proponent of using ome of your retirement nest egg as a means of helping to insure adequate income throughout retirment. Below is an excerpt from an article he published in November of 2005: ************************************************** ***** "That's a shame, because immediate-fixed annuities -- which can provide lifetime income in exchange for a lump-sum investment -- are possibly retirees' best bet for squeezing maximum income out of their retirement savings. What to do? One solution: Buy income annuities -- but buy them on the installment plan. • Locking up income. Even without the fear factor, income annuities are a tough sell, thanks to the rotten reputation of tax-deferred variable annuities, the often-costly retirement-savings vehicles. This is a tad unfair, because immediate-fixed annuities are really a totally different animal. In fact, buying an income annuity is more like buying high-quality bonds, but with a few key differences. An income annuity typically doesn't have any principal value, like a bond does. But the payout should be significantly higher -- and you can elect to get that income for life, thus locking up an income stream you can't outlive. Sound appealing? If you are in poor health, an income annuity would be a lousy investment. But if your health is good, stashing maybe half your nest egg in an annuity could be a smart move. ************************************************** **** I am not saying that the original poster is correct, nor am I saying Mr Clements is correct, but it would appear to me that the advice given is not far fetched. I certainly would not put all of my wealth into an annuity upon retirmement, but could see possibly putting some of it into an annuity to provide an additioanl leel of diversification/income insurance. Just becasue someone says they are a salesman, doesn;t mean they are trying to sell you something. I pesonally think this is a topic that merits some discussion--I know I could learn something.

edited for some typos

[AdventuresAddict]

Quote:

Originally Posted by growing_older Seems earnest and sincere enough. I didn't get "persecution card" from that comment as much as attempt at analogy across cultures and maybe languages. Besides it's an interesting topic. If you do think of dividing your resources to split off some kind of "survival" component which you are looking for greater assurance will be there, why would you trust an insurance company more than widely diversified financial instruments of your own choosing? Insurance companies do go bust and are exposed to the possibility of insider manipulation, criminal activity or just plain management incompetence. And they are dependent on the same market forces that I am dependent on as an individual investor. Not sure I see where that is any more secure than some nice index funds and good asset allocation. Short of trearuries (inflation risk) or TIPS (other complicated risks if that's all you held) I don't see any "guarantees" out there. I don't see the advantage.

What you say is true, especially of the situation in the USA! Here in Singapore, and also in UK and Switzerland, the public perception of insurance companies seems to be better, probably for good reason.

The governance of financial institutions in these countries are probably stricter. I haven't heard of any Singaporean, UK or Swiss insurance company that have gone bankrupt and are unable to meet its obligations since I was born. Even in the US, the probability of a highly rated insurance company going bankrupt is very, very small. There are still some US insurers that are rated AA and above. Alternatively, foreign insurers do offer annuities in US$.

Comparatively, the probability of you buying an insurance (annuity) and not getting paid as promised is much lesser than you investing unprofitably. Remember that while it's true that people who invest as emotionless as computers should 'theoretically' (historically) be able to derive the projected swr, most people----retirees especially---are not as emotionless and disciplined when they have a false sense of security being given the freedom to manage a large, liquid portfolio and have a lot of free time. If you had read a good book written by a psychiatrist called "The Psychology of Risk" you would understand that even professional traders get 'itchy fingers' and do silly, irrational trading because they are bored or are affected by fear or greed. As such, more than 90% of traders underperform.

Even for people who invest in index fund, as long as the liquidity is there for them to change their strategy, there is a high chance they'd get fearful enough to make changes when it's volatile, such as in the current situation. Some might liquidate to cut loss, or some to buy in at 'low price', depending on what they believe.

So in planning for retirement income, we financial planners always take into consideration the human factors. For example, although insurance may not offer a good returns, the forced regular savings design in it makes it attractive to people who procrastinate on saving. Instead of delaying saving and wait for the perfect investment opportunity to appear, it's better to start asap a regular savings program and save something. Having something is better than nothing.

Similarly, for retirees with lots of free time, it's safer for them to park some of their money in an annuity to insure against their 'moments of folly'. Remember, with online trading platforms, it takes just a few clicks to execute such 'moments of folly' trading when one is affected emotionally by fear or greed. So, if your objection is that insurance companies are not 100% secure, then my counter argument is that it's relatively more secure than self-insuring your retirement income by DIY investing. And, as I said, by diversifying your annuities to a few insurers, you further reduce your insurer and currency risks.

And lastly, regarding how the insurer can derive the returns to pay the income. Well, when you buy an insurance, you are transferring the risk to the insurance company. How it can deliver its promise is its problem, not ours. For example, the risk may be transferred to its shareholders, reinsurers, and guarantors. These parties share the risk for good reason. When the business is doing well (most of the time), they make a profit by sharing the risk of the insurance company. And, in a large pool of policyholders, some would die earlier, and their fund would add to the pool of life fund for a portfolio of annuitants. It is the actuary's job to ascertain what is a fair income that can be paid out from this life fund. But in the case of you investing your nest egg yourself, then you are assuming all the risks. You don't have the shareholders, reinsurers and guarantors coming into the picture if your portfolio underperforms and fails to deliver the 4% pa.

[unclemick]

Warning! I missed an appointment with some of the guys this morning - forgot daylight savings time and failed to spring ahead - no doughnuts or coffee!

So when is someone going to mention the creative use of annuities to ward off lawyers, creditors, and other various and sundry bloodsuckers encountered in America?

heh heh heh - I'm not always a sweetie! I know partnerships and other techniques are used but?? And then the ex-pat issue - citizen of the world vs the various inflation/currency problem.

[ats5g]

Quote:

Originally Posted by Hamlet All right, I'll feed the troll My problem with the vast majority of annuities is that you give up an amazing amount of money to shift that risk to the insurance company, and in the end you've only changed the risk, not eliminated it. If your portfolio under performs to the degree that it would have run out by withdrawing 4% a year, isn't that insurance company very likely to be insolvent? The insurance company is buying investments in the same stock and bond markets that we are-- if they massively under perform for a decade, the insurance company is just as likely to run into financial problems as we are. Actually, probably more likely, given the way a lot of them are run I'd rather trust my future to a diversified portfolio of top businesses than to one insurance company, no matter how well run.

The insurance company is taking your money and investing in long term fixed income. For fixed SPIA's, the insurance company is buying long term nominal bonds [gov't + corporate]. For inflation adjusted SPIA's, the insurance company is buying TIPS. This is why when interest rates go down [up], it takes more [less] money to buy the same monthly payout. IIRC, the 4% per year was only really "safe" for 30 years. If you plan on living longer than that, you'd better ratchet it down.

Now, you can certainly buy the same investments the insurance company does [i.e. long term fixed income], but the insurance company can get a big enough pool of people so they can transfer the money from the people that die before they're expected to die to the people that die after their expected to.

btw - a similar discussion was started in 2007: Rational Decumulation.

Here two other papers [the first is easier to read]:

Investing Your Lump Sum at Retirement
Asset Allocation with Annuities for Retirement Income Management

- Alec

[nfs]

Quote:

Originally Posted by AdventuresAddict I haven't heard of any Singaporean, UK or Swiss insurance company that have gone bankrupt and are unable to meet its obligations since I was born.

Are you less than four years old? Google for the AMP failure in Britain in 2003.

Quote:

Comparatively, the probability of you buying an insurance (annuity) and not getting paid as promised is much lesser than you investing unprofitably. Remember that while it's true that people who invest as emotionless as computers should 'theoretically' (historically) be able to derive the projected swr, most people----retirees especially---are not as emotionless and disciplined when they have a false sense of security being given the freedom to manage a large, liquid portfolio and have a lot of free time. ... So in planning for retirement income, we financial planners always take into consideration the human factors. For example, although insurance may not offer a good returns, the forced regular savings design in it makes it attractive to people who procrastinate on saving. Instead of delaying saving and wait for the perfect investment opportunity to appear, it's better to start asap a regular savings program and save something. Having something is better than nothing. ...

Translation for the layman: Individual investors are idiots. Only a planner can save an idiot investor.

Where do they manufacture this bumf?