Milevsky Product Allocation & Retirement Income

[Midpack]

I have no pension or retiree health care (aside from Soc Sec/Medicare) and my strategy during the accumulation phase was always build the biggest nest egg I can and keep it ALL invested, making periodic withdrawals, until DW and I go poof.

Now that I am getting much closer to retiring, I am giving alternatives more consideration. I just finished Milevsky's book Are You a Stock or a Bond?: Create Your Own Pension Plan for a Secure Financial Future. It was an interesting read.

He advocates developing a product allocation in retirement that consists of:

• SWiPs - liquid investments you can invest and withdraw from as you please to cover inflation risk and leaving the maximum estate,
• LPIAs/SPIAs - lifetime payout annuities to cover longevity risk & avoid investing behavior issues, and
• GLiBs - variable annuities with guaranteed minimum withdrawal benefit & guaranteed minimum income benefit to cover sequence of return risk.

It's not unlike developing an asset allocation of stocks, bonds, cash, etc. He gives several examples and results depending on all the variables we all wrestle with.

I am going to have to go back and read the last half of the book more carefully. And it appears there's a (soft) sell to have a professional do the analysis.

I have heard these products discussed conceptually here many times before, but never an attempt to quantify a plan for product allocation. Has anyone done this? Have there been discussions that I've missed? Maybe the second time through I'll decide it's snake oil, but my engineer mind was intrigued the first time through...

 

[LOL!]

Didn't Otar's book cover all these things?

 

[chinaco]

A swip is a systematic withdrawal investment plan (say 4% till the portfolio goes broke or one dies).


All of these concerns are covered in Otar's book and in a few other books and papers.


I do not intend to use VAs or EIA at this point. They are too complicated for me to plan with and too expensive and restrictive. I believe I can do an adequate job using annuities. We already have 3 (Pension and SSx2)... when the time is right, I will purchase a non-COLA SPIA.

I am intending to use my pension (non-COLA), our SS, and a plain SPIA (Non-COLA) in combination to provide a base income. There will also be a traditional Portfolio using a SWIP (of sorts < 4%)... but I might employ a T note ladder for income (near term 5 years). To cover inflation for the SPIA and Pension, there will be a reserve fund. The reserve fund is for the future.... I and trying to determine how to do that. I am considering using target funds (not to be touched for 20+ years). I might also use some LT Treasury bonds or TIPS (as bullets) to be used at maturity.

About 80% of our current portfolio will be invested in a mix of stocks and bonds. 20% will cover the SPIA purchase.

I am still working out the details. Even though I am getting ready to FIRE... part of the plan will take several years to implement. But that's ok... I have a big bucket of fixed that I will carry till I get the details worked out.

 

[Midpack]

I've read Otar and I guess I'll have to go through it again. I thought Otar was green zone (you don't need to annuitize at all), yellow zone (annuitize some) and red zone (annuitize all, work longer and/or spend less). And maybe review periodically to see if you're zone has changed.

Milevsky seems to advocate that almost everyone needs to allocate among nest egg, L/SPIA and VA GLiB - just a matter of allocation depending on individual situation.

Longevity risk is the achilles heel of relying entirely on a nest egg, otherwise I'd never give annuitization a thought. At any rate, I would not annuitize now, but maybe partially some years from now.

And the SIRE vs FIRE issue often underlies these discussions here - if you have a pension aside from Soc Sec, it's less of an issue.

 

[Meadbh]

Midpack, I recommend you also read Pensionize your Nest Egg, by Moshe Milevsky and Alexandra MacQueen (2010). It explores the annuity debate in more depth.

Pensionize Your Nest Egg | The QWeMA Group

 

[Independent]

I looked at the longevity/market/inflation risks and thought that simply deferring SS to age 70 provided a base income that easily covered our ordinary living expenses, and which was protected from inflation and market risks. So I didn't see a need for additional annuitized income. Whenever I've looked, deferring SS provides better numbers than buying a private SPIA.

Unlike you, I have a non-COLA'd pension, but I don't count it toward our long term ordinary expense goal because of the inflation risk.

When I retired I did some analysis of VAs with guaranteed lifetime income benefits. I thought the loads on the products ate up any theoretical benefits.

I still keep the option of an eventual SPIA purchase open. Unlike other insurance products, you don't need to worry about losing insurability by waiting. I might buy one if the SS strategy doesn't seem to be working (e.g. Congress cuts SS benefits for people in payout status).

Full disclosure - I'm pretty sure I'm older than you (I was born in 47) and that may have some impact on my willingness to rely on SS.

 

[Danmar]

Great topic. I have read Otar and Milevsky and McQueen. Both very useful. I have noticed that longevity risk is not discussed very much on this forum. I think it might be the DIY/LBYM culture that predominates here. See the thread on SPIA,s . Most people overcompensate for longevity risk by reducing SWR? In any event I would certainly recommend both books.

 

[Midpack]

Midpack, I recommend you also read Pensionize your Nest Egg, by Moshe Milevsky and Alexandra MacQueen (2010). It explores the annuity debate in more depth.

Thank you, I certainly will...

 

[chinaco]

It is a complicated topic. There can be other reasons for using a SPIA other than longevity risk. But it is one of the big considerations.

If you are in strong financial shape, there is not rush to make a decision. That is one of the benefits of having a strong personal balance sheet.

Take your time to be sure that your decision meets your needs. Some people do not purchase them immediately, they wait till later in life. It depends on your overall plan.

If you want a way out... I have read that some companies offer riders that let you some flexibility undo the decision based on certain circumstances... but it comes at a cost.

 

[haha]

If you want a way out... I have read that some companies offer riders that let you some flexibility undo the decision based on certain circumstances... but it comes at a cost.

There must be a 2ndary market in payment streams. All those companies advertising on TV to give you immediate cash for your nasty old accident structured settlements, lottery wins, etc. must be turning these streams over, minus a spread, or they would run into a funding problem.

I have never seen any of these things advertised to a retail market though. Anyone know anything about this?

Ha