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Old 08-03-2012, 09:52 AM   #141
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When I model things like this, inflation is one component, income is another. One does not affect the other, they each affect the overall result.

-ERD50
I agree with your comment, FWIW...

Income can overcome any "shortage" regardless of investment vehicle.

You need to measure each retirement income source (be it an SPIA, a company pension, withdrawls from a retirement portfolio, social security, etc.) on its own merit, and see if the total income meets your retirement income needs.

It's a bit like saying that I can retire, but I'll get a j*b ...

It does not compute...
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Old 08-03-2012, 10:43 AM   #142
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Originally Posted by rescueme
I agree with your comment, FWIW...

Income can overcome any "shortage" regardless of investment vehicle.

You need to measure each retirement income source (be it an SPIA, a company pension, withdrawls from a retirement portfolio, social security, etc.) on its own merit, and see if the total income meets your retirement income needs.

It's a bit like saying that I can retire, but I'll get a j*b ...

It does not compute...
+1
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Old 08-03-2012, 11:19 AM   #143
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Originally Posted by ERD50 View Post
When I model things like this, inflation is one component, income is another. One does not affect the other, they each affect the overall result.
There is some correlation, though it seems to break down most often during periods of high inflation (understandably as that squeezes profits more acutely than normal). Not going to debate it, so FWIW...just one of many discussions Is There a Correlation Between Inflation and the Stock Market | InflationData.com
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Old 08-03-2012, 11:55 AM   #144
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Quote:
Originally Posted by ERD50
When I model things like this, inflation is one component, income is another. One does not affect the other, they each affect the overall result.
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Originally Posted by Midpack View Post
There is some correlation, though it seems to break down most often during periods of high inflation (understandably as that squeezes profits more acutely than normal). Not going to debate it, so FWIW...just one of many discussions Is There a Correlation Between Inflation and the Stock Market | InflationData.com
Sure, there is probably correlation between inflation and earnings - I was getting some pretty big % raises back in the 80's. But in the context of the poster, he's looking at part-time work. I think the hours worked is the prime variable in that scenario, not wage inflation versus price inflation.

Interesting link, I'll read that in more detail later.

-ERD50
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Old 08-03-2012, 01:12 PM   #145
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Measure with a micrometer, cut with an axe.

Always works!

Ha
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Old 08-03-2012, 01:43 PM   #146
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Measure with a micrometer, cut with an axe.

Always works!

Ha
I don't think is really about measuring or cutting, as much as it is just trying to understand the effects.

To keep with the analogy, I know that this piece of wood I'm cutting will expand with humidity. I might even look up the reference books which give typical rates for that species. But I don't know the exact humidity, or how much this wood has absorbed, or how high the humidity might get, and each piece of wood is going to vary.

But if I know it's been in low humidity for weeks, I know to cut it a bit small to allow for expansion when it does get humid. You don't need to get down to microns, but it helps to understand about where you are and about which way things are likely to go. It's better than not knowing/accounting.


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Old 08-03-2012, 02:04 PM   #147
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Internetizens have a touching faith in the constancy of history, and it's efficacy at predicting the future.

All of our members analytic skills and modeling abilities are outstanding. It's the relevance of these methods to the task given to them that I question.

My remarks were not directed at you or any other individual, ERD50. Your post just happened to be the one above mine

Ha
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Old 08-03-2012, 02:14 PM   #148
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Measure with a micrometer, cut with an axe.
You left out the critical second step: "mark it with a grease pencil, ..."
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Old 08-03-2012, 02:15 PM   #149
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Internetizens have a touching faith in the constancy of history, and it's efficacy at predicting the future.

All of our members analytic skills and modeling abilities are outstanding. It's the relevance of these methods to the task given to them that I question.

My remarks were not directed at you or any other individual, ERD50. Your post just happened to be the one above mine

Ha
That's fine, and I agree that often the math can be correct, but maybe not relevant.

But when it comes to trying to evaluate our financial options, you need to make some assumptions - what else can you do?

-ERD50
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Old 08-03-2012, 02:27 PM   #150
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I go with "measure twice, cut once" .

When it comes to annuities (I'm talking immediate type), to continue with the tool analogy, annuities are neither right nor wrong. Just need the right tool for the job.
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Old 08-03-2012, 03:30 PM   #151
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I go with "measure twice, cut once" .

When it comes to annuities (I'm talking immediate type), to continue with the tool analogy, annuities are neither right nor wrong. Just need the right tool for the job.
Oh, sure. That's what we all say. But then that electric hammer salesman invites us all to lunch, and before ya knows what happened...
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Old 08-03-2012, 03:40 PM   #152
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Oh, sure. That's what we all say. But then that electric hammer salesman invites us all to lunch, and before ya knows what happened...
Who knows...If you have a bum wrist, an electric hammer might be handy..

Or you can just hire a handyman..but those darn fees
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Old 08-05-2012, 01:58 AM   #153
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Thank you for your comments, Meadbh.

1. yes, my individual deferred annuity purchases will be quite small over the next 15 years, the rest of the money I save goes to CDs laddered until I am 62. This is my own way of taking my mortality credit into account. Don't want my annuities to exceed $250-300k either for reasons discussed in other threads.

2. I understand that my approach (annual small deferred annuities until 62 and laddered SPIAs in retirement) would not work for everyone. But I found that using this approach optimizes my annual withdrawal.

3. please can you let me know more about how you start ER by withdrawing from your RRSP early to minimize your mandatory minimum withdrawals later ? I don't understand. Thank you.


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Given that you are a long way from 62 IIRC, your individual annuity purchases must be quite small.

Of course we live in different countries, but I don't think that approach would work well for me for three reasons. First, by spending the interest now, I would lose the opportunity to reinvest it. Second, I would not benefit that much from additional deferred income in retirement because income is taxed at a higher rate than dividends or capital gains. My goal will be to keep taxable income as low as possible. This may mean starting ER by withdrawing from my RRSP early (within the lowest tax bracket) to minimize mandatory minimum withdrawals later. If I do buy annuities it will be with money from my RRSP, exchanging one form of taxable income for another. Finally, I think it would be more advantageous to buy annuities in a higher interest rate environment, and when I am older, both of which would increase the ROI.

Different strokes for different folks. I do agree with diversifying annuity purchases.
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Old 08-05-2012, 02:04 AM   #154
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Your points are well taken, ERD50.

As mentioned above, buying small deferred annuities until I reach 62 is one way of factoring in my mortality risk. I will buy these small deferred annuities with about a third of my annual interest payments from my investments. The SPIAs included in my model after age 62 are larger.

Yes, I agree re : inflation offset by part time work, possibly mixing apples and oranges. But do the other three reasons I gave in my post seem reasonable to you ? What inflation number do you use for the duration of your retirement and why ?
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Also, I think you are mixing apples/oranges with your inflation offset by part time work. True, that mitigates the effects of inflation on your total NW, but (depending on your spreadsheet construction), it might be making the annuity look better than it really is? The inflation still affects your real annuity return, work or no work.
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Old 08-05-2012, 02:36 AM   #155
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3. please can you let me know more about how you start ER by withdrawing from your RRSP early to minimize your mandatory minimum withdrawals later ? I don't understand.
No problem obgyn, I will attempt to explain. An RRSP (registered retirement savings plan) is similar to an IRA, but of course not all the rules & regulations are the same. Gains, income and dividends within the RRSP are all tax-sheltered. There are no restrictions on taking money out of an RRSP, except that whenever you do, it will be taxed as income at your marginal rate. Many people use their RRSP to put a downpayment on their first home but they must replace the money within a fixed time to avoid the taxes.

RRSPs work most effectively when you invest in them while you have a high personal income (when the amount invested will be tax deductible), defer withdrawals for many years, and take out money during retirement, when your income will be minimal and your marginal tax rate will be low. But what if your RRSP is too big? Once you reach 72, you must convert it to an RRIF (registered retirement income fund) or an annuity. The RRIF is more flexible, but in the first year, you must withdraw over 7%, with gradually increasing mandatory minimum withdrawals. Add that mandatory withdrawal to CPP (Canada Pension Plan) and OAS (Old Age Security) and you can find yourself back in a higher tax bracket, with OAS clawed back. You have still deferred taxes, and hopefully your money has grown, but perhaps there's is a better way to minimize taxes and preserve those government benefits.

Now let's suppose you ER at 55. There are 17 years till age 72, when you must begin to withdraw from the RRSP. 17 years of minimal income. During that time you could draw down on the RRSP to the extent that you can while staying in the lowest income tax bracket, topping up if need be with other investments. By the time you reach 72, the amount left in the RRSP is considerably less than it otherwise would have been. And mandatory withdrawals, being smaller, are thus less likely to generate a significant tax liability. Meanwhile, your taxable portfolio is larger than it would otherwise have been and can be tapped without tax consequences.

My understanding is that IRAs cannot be drawn down early in the same way, but please correct me if I'm wrong.

If people want more detail, there are extensive discussions and modeling of this issue over at the Financial Webring Forum, which has a Canadian focus. You have to join to read the forum. Also, I recommend Googling "your retirement income blueprint" by Darryl Diamond. He calls this strategy "topping up to bracket".

I hope that is helpful!

Meadbh
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Old 08-05-2012, 08:17 AM   #156
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What is your approach, samclem?
Our situation is a bit different. I receive COLA'd retirement pay now, and hope to receive COLA'd Social Security starting in about 16-19 years. I'm dependent on my investments (and my present PT income) to fill the gap until we collect SS and to provide additional funds above these monthly checks so we can maintain our present spending level. I don't plan to buy any annuities unless our portfolio performance, spending, and attained age line up such that annuities provide the best way for us to maintain our standard of living. If it happens at all, it won't be for quite a while and they will be SPIAs.
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Old 08-05-2012, 02:31 PM   #157
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Your points are well taken, ERD50.

As mentioned above, buying small deferred annuities until I reach 62 is one way of factoring in my mortality risk. I will buy these small deferred annuities with about a third of my annual interest payments from my investments. The SPIAs included in my model after age 62 are larger.

Yes, I agree re : inflation offset by part time work, possibly mixing apples and oranges. But do the other three reasons I gave in my post seem reasonable to you ? What inflation number do you use for the duration of your retirement and why ?
I don't use a number for inflation, I use FIRECALC. Inflation isn't "a number", it changes over time, and is likely correlated with other things (interest rates for sure). So I'd rather let history be a guide for that.

If I'm doing some calcs and just want to ballpark the effects of inflation for comparison purposes, I use 3%.

Certainly more earnings and adjusting spending will help mitigate the effects of inflation, or poor returns. Even if on average people spend less as they age, I don't want to count on that for myself (recall the 6 foot tall statistician who drowned in the average 4 foot deep pool). Same with trying to predict the date of my demise.

-ERD50
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Old 08-05-2012, 04:09 PM   #158
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Hi Obgyn65 and Rescue me,

This thread has been an education to me on the often ill understood subject of annuities. I am considering annuities in my ER plan and knowing which respective annuities you both have purchased will be a great help to me and other members on the Board.

You two have obviously done an exhaustive research on this subject and if you do not mind sharing the respective specific annuity product from the specific Ins. company, I will be thankful for the benefit of knowing.

Thanks and regards
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Old 08-05-2012, 04:28 PM   #159
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My understanding is that IRAs cannot be drawn down early in the same way, but please correct me if I'm wrong.
Those with (U.S.) IRAs can withdraw money from them without penalty before reaching 59 1/2 years old, but there are limitations on how much. It's called a "72(t)" withdrawal and there are several rules. You must withdraw "substantially equal periodic payments" (SEPP) (these are based on your life expectancy), you must withdraw at least once per year, once you start you have to take the payments for 5 years or until you reach 59 1/2 YO whichever is longer. Like all Traditional IRA withdrawals, these are taxed as normal income. There's lots more info in other posts about these withdrawals. As you point out, they can be an effective way for some people to avoid larger mandatory withdrawals (and the tax hit that can come with them) in their later years.
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Old 08-05-2012, 04:36 PM   #160
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Thanks for the clarification, samclem.
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