Life Expectancy

[donheff]

Another way to look at longer time periods is to require FIRECalc to end a typical 30 year simulation with a specific amount of money. For example, if you assume the 4% rule is approximately true for a 30 year retirement, you can tell FIRECalc you are going to have a 1-time expense of 25X your annual spending in year 30. This is equivalent to requiring that you end the first 30 years with a minimum nest egg amount required to support another 30 years. Thus, you end up with an approximation for a 60 year retirement.

Wouldn't you have to inflate the one time annual spending amount or would Firecalc treat that as an expectation in today's dollars and automagically inflate it?

 

[cute fuzzy bunny]

And all those donuts.

I just saw on tv the very definition of a life expectancy adjustment device: a frosted donut covered with bacon.

 

[Cb]

Wouldn't you have to inflate the one time annual spending amount or would Firecalc treat that as an expectation in today's dollars and automagically inflate it?

Per SG's original reply:

"...you can tell FIRECalc you are going to have a 1-time expense of 25X your annual spending in year 30."

 

[donheff]

But, Even with the inflation adjustment the $38K would be about a 7.7% SWR on the $500K. The question that everyone would have to ask themselves at age 70 is what Percent of $500K would you be willing to withdraw if you were not buying an annuity with it?

Interesting way to put it. If you were 70 with a $1M portfolio and needed $40K income on top of your SS, you could roughly get your income needs covered with half your portfolio and leave the rest invested at aggressive growth rates. Or, alternatively, you could pull an additional ~$20K per year from the portfolio to blow on stuff and still expect to have your principal intact at age 100. Here we go with the SPIA discussion again.

 

[donheff]

Per SG's original reply:

"...you can tell FIRECalc you are going to have a 1-time expense of 25X your annual spending in year 30."

I read that, but it didn't answer my question of whether your needed to calculate your inflated annual spending 30 years out or if Firecalc would do it. Now that I looked I see that Firecalc answers the question - "Enter in today's dollars; the actual amount will be adjusted for inflation." So if you enter $1M as your lump sum Firecalc will treat it as $3M or whatever the particular run calculates would be the inflated equivalent.

 

[Cut-Throat]

Interesting way to put it. If you were 70 with a $1M portfolio and needed $40K income on top of your SS, you could roughly get your income needs covered with half your portfolio and leave the rest invested at aggressive growth rates. Or, alternatively, you could pull an additional ~$20K per year from the portfolio to blow on stuff and still expect to have your principal intact at age 100. Here we go with the SPIA discussion again.

Yes, that is the way I have been thinking the past couple of years. I don't wish to have a pile at the end, so maximizing spending while I'm alive is the goal.

Ideally the check to the undertaker would bounce, but that would take a bit of luck

 

[sgeeeee]

Wouldn't you have to inflate the one time annual spending amount or would Firecalc treat that as an expectation in today's dollars and automagically inflate it?

We need to ask Dory to be sure, but this has been asked before and my understanding is that the terminal value you get from FIRECalc is in today's dollars. So, for example, if you are spending $40K per year you would expect to need about $1M nest egg for a 30 year retirement. Run Firecalc with an expenditure of $1M in year 30 and you get an estimate of what is needed for a 60 year retirement. If that's not correct, then you would have to assume an inflation rate for 30 years and work from there. It is only an approximation, but another way to fool the historical simulator.


Yeah. . . I just checked. Here is what Dory said:

http://early-retirement.org/forums/index.php?topic=8822.msg159340#msg159340

 

[cute fuzzy bunny]

The terminal portfolio value is in todays dollars; if you look at the spreadsheet output of input values (XLS file) and see what the annual withdrawal is at the end of the final year of the run, thats the cpi adjusted "future dollars" annual withdrawal...for sg's example you'd go back and re-run with that figure x 25 stuck in there as he described.

 

[jdw_fire]

I, too, have not written off immediate annuities in that context: limited to a portion of your nest egg only, immediate, fixed only.

When I last ran these numbers, I found that a very cost effective alternative to a COLA annuity was to buy what you need to start with unadjusted/nonCOLA, then supplement every couple of years with additional smaller annuities to keep up with inflation.

So, you need $3k per month today and buy an SPIA to meet that. In 2 years you need $3.3 per month. Purchase another small annuity to generate the difference of $300 per month. Being two years older, it's a little cheaper than it would have been initially, and you kept your money a couple more years.

Bake for 2 more years, and repeat as needed.

Rich, have you read the book Die Broke? I haven't looked recently but this payout scheme reminds me of Die Broke's payout scheme. In fact IIRC the books goal is that...

Ideally the check to the undertaker would bounce

Now when it comes to

Interesting way to put it. If you were 70 with a $1M portfolio and needed $40K income on top of your SS, you could roughly get your income needs covered with half your portfolio and leave the rest invested at aggressive growth rates. Or, alternatively, you could pull an additional ~$20K per year from the portfolio to blow on stuff and still expect to have your principal intact at age 100. Here we go with the SPIA discussion again.

Some while ago I tried to point out the potential advantage for someone to use IM to enhance their portfolio's SWR with the added benefit of providing a "guaranteed" income floor, thus preventing the eating of cat food in old age. Remember these posts?
http://early-retirement.org/forums/index.php?topic=7503.msg135939#msg135939
http://early-retirement.org/forums/index.php?topic=7503.msg136091#msg136091
and the associated thread? The idea didn't seem to be well received at the time.

 

[JohnEyles]

When I last ran these numbers, I found that a very cost effective alternative to a COLA annuity was to buy what you need to start with unadjusted/nonCOLA, then supplement every couple of years with additional smaller annuities to keep up with inflation. The benefits are:

1. you keep more of your money in the market and/or available to heirs when you die
2. as you supplement you are older and older and thus get more income for your dollar invested.
3. you have the ability to punt on more annuity if inflation is slow or your portfolio is roaring
4. you spread the applicable interest rate over time a bit
5. if you do become seriously ill and plan to die shortly, you will have kept a little more for you and less for the insurance company compared to buying it all and then expiring young.

Interesting. Did you look at the option of a "graded payment" (i.e. 3% per year) instead
of CPI-linked ? The Vanguard/AIG quoter pays considerably more at 3% than for the
CPI-linked "inflation adjutsments" one.

It has many of the advantages of your plan, but if inflation is 3% or less you're keeping
pace with inflation and don't need to annuitize ANY more money.

Just a thought.

 

[Cut-Throat]

Some while ago I tried to point out the potential advantage for someone to use IM to enhance their portfolio's SWR with the added benefit of providing a "guaranteed" income floor, thus preventing the eating of cat food in old age. Remember these posts?

Well, I completely agree with you and don't understand the hostility either. I think it might have to do with a few posters that are still in their 40's that have not come to grips with their own demise.

 

[donheff]

Well, I completely agree with you and don't understand the hostility either. I think it might have to do with a few posters that are still in their 40's that have not come to grips with their own demise.

I was and am sympathetic to your view on this but for couples the case is tight so I can understand the concerns of the other side to the argument. A life annuity is a much better deal for a single person. Once you add a joint annuitant the life expectancy goes up beyond either individual's expectancy so the cost/benefit ration drops substantially. If I was single, I wouldn't think twice about putting part of my nest egg in an SPIA.

 

[donheff]

Interesting. Did you look at the option of a "graded payment" (i.e. 3% per year) instead
of CPI-linked ? The Vanguard/AIG quoter pays considerably more at 3% than for the
CPI-linked "inflation adjutsments" one.

It has many of the advantages of your plan, but if inflation is 3% or less you're keeping
pace with inflation and don't need to annuitize ANY more money.

Just a thought.

You got me interested so I ran Rich's plan against a 3% adjusted annuity for DW and I starting immediately on Vanguard's calculator. It would take 27-28 to break even on the 3% adjusted. It looks like a reasonable bet would be calculate what you would want as the annuity income if you were adjusting at 3% and put the equivalent principle on a fixed. Then start out investing the difference in a fixed income fund that you could tap to cover living increase costs if needed. Only increase the amount you spend if your real expenses go up.

 

[Cut-Throat]

I was and am sympathetic to your view on this but for couples the case is tight so I can understand the concerns of the other side to the argument. A life annuity is a much better deal for a single person. Once you add a joint annuitant the life expectancy goes up beyond either individual's expectancy so the cost/benefit ration drops substantially. If I was single, I wouldn't think twice about putting part of my nest egg in an SPIA.

Don the numbers that I ran a few posts back were for a couple. Did not look like a bad move to me as you pointed out.

 

[Cut-Throat]

Rich, have you read the book Die Broke? I haven't looked recently but this payout scheme reminds me of Die Broke's payout scheme.

Who is the author and what is the title of this book?

 

[cute fuzzy bunny]

and the associated thread? The idea didn't seem to be well received at the time.

On re-reading the threads, frankly it looked like a good fleshing out of options and ideas, until the very end when all that was left was people shouting their opinions past each other...which seems to happen a lot. While there is and was some feeling of hostility, most of it came from the classic "If you dont agree with my example, you simply must not have understood it, and if I explain it again and you still dont agree with it, then you're an idiot".

Hell, after I said several times that I thought annuities were worth looking into, people should run their numbers, and having a portion of assets invested in one might be a very good diversifier, that perspective was labeled "anti annuity, would never buy one". Certainly an interesting interpretation.

Heres a fun question though, and I dont know the answer but would like to find out...I hear an awful lot of people bringing up the annuities they bought 10-20-30 years ago and its usually accompanied with lamentations or comments like "stuck with" or "cant get out of".

Anyone had an annuity for more than a decade or two and feel it was a great investment decision? Would you do it again if you had the chance? If not, what would you have done differently?

 

[Cut-Throat]

Anyone had an annuity for more than a decade or two and feel it was a great investment decision? Would you do it again if you had the chance? If not, what would you have done differently?

I've never bought one.

I don't think I'd be too interested in annuities if I was in 'Investing Mode'. My current attraction to them is a way to increase your SWR in old age.

Let me ask you a question. If a 70 year old came to you and asked for advice about how to increase his monthly income stream from his current 4% SWR on his portfoilo. And he was not interested in leaving an estate.

What would you recommend he do?

 

[cute fuzzy bunny]

Depends. How much does he have and how much is he withdrawing now, how much would he like to withdraw and what he wants the money for, how long he wants it to go on for, what his tolerance for risk is, etc.

I might employ portfolio consumption, higher stock allocations, high quality junk, long term cd's, an annuity or any one of a bunch of things. Ten or thirty years, high or low risk, needing just a few thousand more or a lot more. Wanting to spend the money on durable things with resale value vs blowing the money at a slot machine.

Lots of things to consider.

 

[Cut-Throat]

Depends. How much does he have (Let's say $1 Million) and how much is he withdrawing now ($40K), how much would he like to withdraw(as much as possible with a Cola) and what he wants the money for (Fun), how long he wants it to go on for (Until age 120), what his tolerance for risk is (Little or None), etc.

I might employ portfolio consumption, higher stock allocations, high quality junk, long term cd's, an annuity or any one of a bunch of things. Ten or thirty years, high or low risk, needing just a few thousand more or a lot more. Wanting to spend the money on durable things with resale value vs blowing the money at a slot machine. (Blowing it on Travel, Wine, Dine and Recline)

Lots of things to consider.

 

[Nords]

Who is the author and what is the title of this book?

Here, Cut-Throat, lemme get that for you:

"Die Broke: A Radical Four-Part Financial Plan"

and it looks like they're expanding the franchise...

 

[cute fuzzy bunny]

I would advise him to rethink his age requirement because he's 95% likely to be dead within 15 years and if he wants to spend crazy and leave nothing, he could easily take on a lot more portfolio risk and get a range of investing options that would produce high income with reasonable safety of making it to 90-95.

Certainly by figuring in an unreasonable age, most constructions would produce an inferior result on paper as you're effectively hogtying the options to an annuity or a 4% SWR. Since the 4% withdrawal is insufficient to meet the desired needs the only realistic option meeting the little/none limit is the annuity. Except the annuity wouldnt meet the requirements either as its not going to get a low risk assessment due to the length of the annuity - 50 years - some insurers would go under or lose the ability to pay, most annuities standard 10% inflation cap could, over 50 years, severely reduce income. Bunch of risk there, and your hands would be tied to change anything or solve the problem.

Tough to resolve the dichotomy between someone who will accept no risk but is concerned enough about outliving 99.99999% of the population to plan for it. His horizon is longer than mine and i'm 25 years younger.

In the presence of a more reasonable age cap of 90-95, I'd suggest investing in target retirement income or wellesley for about 40%, 10% in 6.25% cd's, 10% in brewers sallie mae bonds, and 20% in dividend paying large cap value and 20% in dividend paying small cap value.

I'd take the dividends and interest thrown off and spend it...i'm estimating that'd produce rougly 5-5.5% withdrawal. Then I'd withdraw whatever additional funds I wanted to spend from whichever bucket has shown the most appreciation in that year.

The 54% stock allocation would provide enough lift over the 20-25 year period to offset the higher rate of portfolio consumption while the portfolio overall would provide a decent level of nearly guaranteed income.

It should be possible for someone in that situation to spend a total of roughly 7-7.5% until they drop dead, with a decent lump laying around to provide very high quality, very comfortable care in their final years.

Too spooky? Trade in the target retirement/wellesley for total bond market. Cut about a half percent off the withdrawals. 70-75k is a pretty good chunk of change for someone who originally planned for 40k.

Might even make it to 120.

 

[Cut-Throat]

Since this was a Life expectancy thread.

Well, If I was that 70 year old person. I would not plan on anything less than age 100. I have had 3 Grandparents live over age 95. I would have at minimum a 30 year plan - Nords needs age 120!

Plugging in the numbers for FireCalc the SWR is only 3.7% with a 50/50 stock portfoilo - Anything more could deplete the portfolio to zero, which would leave nothing for long term care and nothing for the catfood he would have to buy to eat!

My advice today (with what I've learned so far) would be to buy an annuity with Cola Adjustment for $500K and get about $38,400 income per year guaranteed. Then with the other half, invest and continue to take about 4% which would give another $20K. I think it be far more comfortable for the 70 year old to spend $58,400 coming from $40K, especially since his $40K is now guaranteed! He is now spending an extra $20K ~ per year and reduced his risk in the process. remember he had little tolerance for risk at this stage in his life

 

[cute fuzzy bunny]

Well see, theres some new data and rules.

For starters, firecalcs 50/50 portfolio would look nothing like what I proposed, but then its tough to propose something thats workable in a no-win situation where theres only one accepted outcome and new data and rules keep appearing to make any alternative proposal undesirable.

What I proposed was some fairly high returning investments (far greater potential than the TSM component that Firecalc uses), coupled with some bond ballast and some cash equivalents that could be eaten in years when the stock component didnt do well.

It also seems you missed the part about the insurance company perhaps not paying out or existing in 50 years, and the inflation cap causing some problems in that time frame. Sort of defuses 'guaranteed'.

Since the original firecalc run you propose is 100% safe, you also likely didnt reduce the risk in the process either.

While I enjoy the banter and perhaps somebody learns something from these discussions, you really didnt pay much attention to what I had to say the last time and insanity IS defined as doing the same thing over and over while anticipating a different result...

Clearly your mind is made up and like the last time, you'll continue to either change the base parameters, eliminate other options or change the expected outcome to eliminate any other options presented.

Firecalc was a good tool until it produced results contrary to your plan, but now its good again because using it in an asymmetric fashion produces the 'right' results. Firecalc and the 25x rule are too conservative and leave too much money left over for people who will die before they spend it, but when considering alternatives to what you've decided to do, the 25x rule becomes paramount, as does life expectancies to 100-120. PICK ONE!

Heres my own worst case scenario to suit: guy buys his annuity, inflation runs to 18% for the following 10 years, with the 10% CPI cap reducing his buying power by 80%. The insurance company then goes bankrupt. Guy now has 20k a year income and his new downsized portfolio is non-survivable for more than a short period of time. In the meanwhile the stock market returns 30% a year for those ten years and the uncapped CPI bonds in the alternative portfolio keep pace with the 18% CPI. Bummer.

If that doesnt work, how about after the third year, all the guys arms and legs fall off, and the little used clause in the annuity that calls for it to suspend payments should the annuitant become armless and legless kicks in.



Good luck with your plan.

 

[cute fuzzy bunny]

By the way, looks like we're clumped in the 80-100 range, with the bulk on 90. It might have been interesting to cut the granularity into 5 year ranges to see if that would cause some of those 90's to slip to 85 or 95.

Since 95% of people will be dead by 90, that seems a reasonable average planning assumption, barring a family full of long lived relatives and superior health.

 

[Cut-Throat]

CFB,

You changed the rules immediately from my example. I said Age 120, you knocked it down to age 90-95.

I actually was hoping that you had a better plan that was going to be safer than mine!

When you said you would invest in even higher returning investments, does that not entail even more risk? Remember low tolerance for risk!

All I did was ask you a question and I was hoping you would stay in my parameters. I don't have my mind made up at all. But your proposed 'plan' has more risk than I would want at age 70 and I stipulated that the 70 year old had little or no tolerance for risk