Milevsky: What Does Retirement Really Cost ?

[MasterBlaster]

Could you give some examples of the numbers you're using? The tone of your post suggests that the "portion" of your FIRE portfolio you think you need to put into an annuity paying enough in real terms in 30 years to provide longevity insurance is not large.?

To be fair here we need to distinguish two separate annuities. The first would cover the period from when you retire until your demise. The second would cover the period from the median age of death (of the annuity pool) until your demise. Subtract the cost of the second annuity from the first to get the true cost of an annuity that does not provide longevity risk. Both annuities should have an inflation rider on them so that the payment stays (in real terms) somewhat constant. Alternately, some insurance companies have started selling annuities that only kick in at older ages (age 75 or 80 for example). Those could be used instead to fund longevity risk. In the meanwhile the (remaining) nestegg could be spent to zero over the timeframe before the longevity insurance annuity kicks in. In theory nothing would be left on the table when you go.

Are these products expensive ?.... You bet they are, but they may be way cheaper than holding back your own stash to fund your own longevity risk. Again, The products are priced to some sort of pool median age. Because of that they just may be way cheaper than providing your own longevity stash.

Are the underlying insurance company fees high ?...perhaps they are, perhaps they aren't so high. As always shop around and compare. Vanguard has some great products at reasonable rates - for example.

Edit: An addition question if you don't mind. You mention that retirees hold funds in fixed investments to provide for longevity insurance if they don't have annuities. At first I thought that I'm an exception to that. My AA is approximately 50/50 5.4 years into RE (age 64). I have no special stash set aside for longevity insurance. Are you saying that if I had a significant annuity, that I could/would change the AA of my remaining portfolio to something significantly more aggressive such as 90/10 or even 100% equities?

While equities may do fantastic over long time frames, there is no guaranty that they will do so well over the timeframe that you need them to. Don't kid yourself, By holding equities in your nestegg, the risk of your portfolio is higher. There is no guaranty of growth over your timeframe of interest. Insurance companies, on the other hand, can hold their investments much longer than you can and spread the risk over people of a wide variety of ages and retirement durations. Insurance companies also have some risk, but it will be considerably less than whatever you can come up with.

Again, to recap - I am not suggesting anyone put everything into annuities. I am suggesting that we here on this forum (perhaps wrongly) reject some insurance products out of hand when they could be very helpful.

 

[youbet]

What I see... is a basic model for analysis of some independent variables that are non-determinant yet their outcomes have an affect on the overall problem at hand.

Oh! You're just BSing! Sorry, I thought this was a serious thread.

That basic model could be extended a little to do further analysis about someone's situation to better understand the issues and help them make certain decisions.

Yes indeed. I can use the info to determine who'll win the Series and make myself some longevity self-insurance money by placing some bets down at the pub this afternoon.

As for an annuity... even if you intend to self-insure your longevity... you still need to provide an income stream (annuity that is DIY funded) for a non-determinant term (longevity risk) and probably have some assumed range of returns (implied investment oriented risk).

I'm not self-insuring my longevity. (You really grab onto the annuity salesman's terms, don't ya?) I'm providing an income stream for the remainder of my life, and beyond for my family, through withdrawals from a FIRE portfolio and from SS. So far, 5.4 years into RE, it seems to be working OK.

I'd gladly consider an insurance company annuity as an addition to my FIRE portfolio if I could get the numbers to work. But when I try to account for inflation, either the diminishing real value of non-inflation adjusted annuties or the high premium of inflation adjusted annuities makes it seem not worth buying. Refer to my comments to MasterBlaster.

 

[youbet]

To be fair here we need to distinguish two separate annuities. The first would cover the period from when you retire until your demise. The second would cover the period from the median age of death (of the annuity pool) until your demise. Subtract the cost of the second annuity from the first to get the true cost of an annuity that does not provide longevity risk. Both annuities should have an inflation rider on them so that the payment stays (in real terms) somewhat constant. Alternately, some insurance companies have started selling annuities that only kick in at older ages (age 75 or 80 for example). Those could be used instead to fund longevity risk. In the meanwhile the (remaining) nestegg could be spent to zero over the timeframe before the longevity insurance annuity kicks in. In theory nothing would be left on the table when you go.

Are these products expensive ?.... You bet they are, but they may be way cheaper than holding back your own stash to fund your own longevity risk. Again, The products are priced to some sort of pool median age. Because of that they just may be way cheaper than providing your own longevity stash.

Are the underlying insurance company fees high ?...perhaps they are, perhaps they aren't so high. As always shop around and compare. Vanguard has some great products at reasonable rates - for example.




While equities may do fantastic over long time frames, there is no guaranty that they will do so well over the timeframe that you need them to. Don't kid yourself, By holding equities in your nestegg, the risk of your portfolio is higher. There is no guaranty of growth over your timeframe of interest. Insurance companies, on the other hand, can hold their investments much longer than you can and spread the risk over people of a wide variety of ages and retirement durations. Insurance companies also have some risk, but it will be considerably less than whatever you can come up with.

Again, to recap - I am not suggesting anyone put everything into annuities. I am suggesting that we here on this forum (perhaps wrongly) reject some insurance products out of hand when they could be very helpful.

Would you mind using some numbers to illustrate? How about my example of using $20k SS + a $1M FIRE portfolio with a 3.5% WR to get a desired $55k (real) RE income. Assume that $45k of this is basic needs and $10k is descretionary.

When I try to find inflation protected annuities (joint with DW) to plug in, their high cost (reduction to my FIRE portfolio) makes it impossible to find a annuity/remaining portfolio mix that works.

In FireCalc, I reduce my current FIRE portfolio value by the cost of the inflation protected annuity and add the annuity payout as an inflation adjusted pension. My results get worse instead of better, although the distribution of outcomes appears tighter.

I must be missing something.

I do agree with you that using an inflation protected annutity is a must if you're looking to cover the risk of running out of money late in life. Without inflation protection, the risk of a few years of high inflation (think the 70's) destroying your protection is just as great as the risk of a market crash doing so. Maybe more so considering that the 70's inflation was more detrimental to retirees than the Great Depression.

BTW, as stated in my posts (above), I'm NOT rejecting all annuities. I agree, some people seem to be.

 

[Hamlet]

I'm not all that worried about longevity risk. What am I going to spend a lot of money on when I'm 90? If my house is paid off, and I have SS and Medicare, I'm not going to be eating dog food.

I see lots of people living just fine on less than what my SS is going to be (assuming it is around). If we've gutted SS I suspect that Rome will have burned before I reach 90 anyway.

I don't expect to run out of money, but I'm not going to hand over a large portion of my assets to an insurance company out of fear of it.

 

[youbet]

Wow, guys, I've rarely disagreed with so many of the comments here.

You all remember Milevsky from the 1990s, right?

My negative comments were strictly about the article. Nothing about Milevsky's career or accomplishments in general.

I think Milevsky's one of the good guys.

No argument from me. Even the best of the best find themselves occasionally endorsing a product or position as part of monetizing their hard earned reputation. We all have to live, to have a little income. Watching Dan Akroyd on TV doing commercials for a local chain of liquor stores comes to mind.......

 

[walkinwood]

Good article and if you're just beginning to think about ER and how much you need, you should read this and know your options.

Milevski speaks about unscrupulous FPs who use historical average returns, but leaves out the SWR method based on historical return. That too entails risk, but not as must (imho) as relying on historical 'average' returns.

Milevsky doesn't examine the risks of insurance companies going out of business. There is some backup - I think up to $300,000 (am I correct?) - but that's peanuts when you're talking about financing your entire expense needs at today's interest rates.

Annuities get even more expensive for early retirees. His example starts at 65. For me, that's another 14 years away.

 

[youbet]

Hello traineeinvestor - like you I wished I could someone offering good annuity terms. A few weeks ago I got the documentation I asked from the Immediate Annuities - Instant Annuity Quote Calculator. website with different quotes and advice. The information looks quite good. Please let me know if you find other companies with reasonable terms.

I've been using this site too. Unfortunately, it seems that in order to get quotes for inflation protected products, you have to provide your personal contact information and let them contact you. Or am I missing an option in the choices?

 

[FinanceDude]

I personally met Moshe at an event and he is one of the smartest people I have ever met. He has NEVER advocated putting all our assets into an annuity.........

 

[youbet]

Hey FD....

What's the easiest way to get quotes for inflation adjusted fixed annunities (joint)? The site I've been using for quotes wants me to provide personal contact info so a salesperson can contact me.... No way!

They do provide non-inflation adjusted annuity quotes on line. But I'm looking for inflation adjusted annuity info as Milevski recommends.

 

[FinanceDude]

Hey FD....

What's the easiest way to get quotes for inflation adjusted fixed annunities (joint)? The site I've been using for quotes wants me to provide personal contact info so a salesperson can contact me.... No way!

They do provide non-inflation adjusted annuity quotes on line. But I'm looking for inflation adjusted.

I don't know of a good public site. I have the same issues, all those places want your name and phone and email........ The insurance brokerage companies I use all require a password and you have to be appointed with at least one of their companies. If anyone finds a good one I don't know about I hope they post it........

 

[obgyn65]

Hello youbet - I gave them my phone number put have asked them not to call me. And they have not called me (so far).

Unfortunately, it seems that in order to get quotes for inflation protected products, you have to provide your personal contact information and let them contact you. Or am I missing an option in the choices?

 

[clifp]

Hey FD....

What's the easiest way to get quotes for inflation adjusted fixed annunities (joint)? The site I've been using for quotes wants me to provide personal contact info so a salesperson can contact me.... No way!

They do provide non-inflation adjusted annuity quotes on line. But I'm looking for inflation adjusted annuity info as Milevski recommends.

I use the TSP annuity calculator (I am not sure who the underlying issuer is) which gives inflation protected quotes. Given that the Federal government has done excellent jobs in providing low cost options for retirement I assuming that this is a competitive with private insurers. The annuity is capped at 3% increase year so it isn't a true COLA annuity. I also think, probably naively, that Uncle Sam would stand behind the annuity if the insurance company failed.

The bad news is annuity rates hit a record low in Oct 2.3875%, so at age 52 at 100K COLA light annuity would give me $218/month if was married it would be $170. It looks more promising at 65 $386 single, $300 married.

But I just don't see annuities as currently viable for early retirees. The same 100K invested in S&P500 (SPY) would have paid an income of $171 month this last year from dividends of S&P500 companies. So you get the same income as the annuity, you have a good chance of dividend growth keeping up with inflation, (even if exceeds 3%). Plus you have the 100K not the insurance company.

I fully intend to use an annuity as longevity insurance, by delaying SS until 70, (unless I am in poor health when I am in my 60s.).

 

[FinanceDude]

There is a company offering a non-COLA at $6200 a year on $100K at age 65. It pays on joint life and refunds any money left if both annuitants die early.

 

[traineeinvestor]

Hello traineeinvestor - like you I wished I could someone offering good annuity terms. A few weeks ago I got the documentation I asked from the Immediate Annuities - Instant Annuity Quote Calculator. website with different quotes and advice. The information looks quite good. Please let me know if you find other companies with reasonable terms.

Thanks for the link. Unfortunately, most (all?) US annuity providers either wont or cant sell to non-US residents. From what I understand from reading the IRS website (which was something of an exercise in futility), it appears that 30% non-resident witholding tax would be deducted on all payments. I lost interest at that point. The very limited alternatives on offer in HK are worse than investment grade corporate bonds.

 

[youbet]

Thanks FD, clifp and obgyn65.

I agree with Milevski that a fully cola'd annuity is the only way to go, if you're going to make an insurance company annuity a part of your FIRE portfolio at all. And in my case that also means a joint annuity. It looks like I may have to follow obgyn65's lead and give them my personal contact info to get a quote and see what happens.

So far I've been using a data point I extrapolated from Milevski's article. He said a $12k fully cola'd annuity would cost $230k for a single. I swagged a 20% increase over that to estimate the cost for a joint annuity. I'm 64 and he said that figure was for age 65, so close enough.

So far, I'm not seeing results that really interest me. I'd need to give up well over a half Mil of my FIRE portfolio to get $24k of annuity cola'd cash payments. And I'm not very confident in my half Mil+ premium estimate. It's likely more.

Guess I'll have to see if I can get an actual quote.


Edit: clifp, I just exercised the TSP annuity calculator you provided. I had to go to a permium of $330k to get $12k annual cola'd payments with survivorship for my wife. That ties exactly with the $300/mo with a $100k premium you got. And that's not full cola. As you said, it's capped at 3%.

This seems very expensive and congruent with clifp's comments regarding current rates. Does anyone have a source for historical annuity rates? I'd like to try to develop a sense of where we are today vs historical rates and the ability to be able to recognize better values sometime in the future.

 

[FIREd]

Just another data point: MIL bought a fully cola'd SPIA last year. Her $100K lump sum gave her an annual income of $5,400 the first year. Single life, she was 66 at the time. Of course, since then, interest rates have come down quite a bit.

 

[youbet]

Just another data point: MIL bought a fully cola'd SPIA last year. Her $100K lump sum gave her an annual income of $5,400 the first year. Single life, she was 66 at the time. Of course, since then, interest rates have come down quite a bit.

Thanks. Your MIL did well to act when she did. According to the TSP site clifp provided a few posts back, she'd only get $4,600 today. And that figure goes with a cola'd annuity capped at 3%.

 

[clifp]

Thanks FD, clifp and obgyn65.



This seems very expensive and congruent with clifp's comments regarding current rates. Does anyone have a source for historical annuity rates? I'd like to try to develop a sense of where we are today vs historical rates and the ability to be able to recognize better values sometime in the future.

Here is a link for historical rates from the TSP calculator. They were in the 5% range in 2007 4% in 2008 2 and 3% since then. My guess is historically annuity rates have been in the 5-7% range since 10-30 year treasury bonds have been in the 5-7% for most of the last 15 years.

 

[youbet]

Thanks clifp! I just invested a half hour on that site. Very interesting.

I wonder if it is safe to assume that an individual not engaged in public service could shop around and find an annuity priced close to the TSP annuity and offered to just plain ole everyday private sector folks?

I'd love to have access to the algorithm they use to convert the index annuity interest rate into the various annuity payouts (based on features). But, just having the interest rate table does provide a great historical perspective. Thanks again.

 

[rescueme]

To be fair here we need to distinguish two separate annuities. The first would cover the period from when you retire until your demise. The second would cover the period from the median age of death (of the annuity pool) until your demise.

I'll give you a third, based upon our "real life" situation, and I would think would be a situation for an ER type.

That is, consideration of an "annuity" (for DW/me, that means an SPIA) to cover the date of retirment until the date of all retirement income sources come "on-line", and continuing till both pass.

For us, that means retireing at age 59 (me) and getting five separate income streams up to, and including age 70 (when I plan to take SS), at various ages, for DW and myself.

Just to throw in an alternative situation - especially for those that have a pension kicking in at age 65, or no pension at all (as is my situation).

Define the need; investigate the available products to meet that need, regardless of what they may be, including just simple portfolio withdrawls.

There is no "one answer" to multiple questions...

 

[Nords]

I wonder if it is safe to assume that an individual not engaged in public service could shop around and find an annuity priced close to the TSP annuity and offered to just plain ole everyday private sector folks?

I haven't checked in years, but Vanguard used to have an annuity calculator on their website. They're probably still selling them (annuities, not calculators) but you might have to talk to a rep.

Another option is Berkshire Hathaway. But they're in it for the money and won't hesitate to lose market share if the numbers aren't in their favor.

 

[MichaelB]

I haven't checked in years, but Vanguard used to have an annuity calculator on their website. They're probably still selling them (annuities, not calculators) but you might have to talk to a rep.

Another option is Berkshire Hathaway. But they're in it for the money and won't hesitate to lose market share if the numbers aren't in their favor.

Vanguard has the calculator, it requires account logog, and only provides an online quote for fixed payment annuities. Like the other online tools, inflation adjusted annuities require phone contacts.

 

[Independent]

While annuities may have their place in retirement planning (and I wished I could actually find someone offering them on reasonable terms out here), they are of limited use for early retirees due to the extended expected duration. If you FIRE early enough, annuities will be too expensive to consider. Almost by definition, if you can afford to retire at an age when annuities are too expensive to be viable, then you should have enough to see you through retirement without them - buying an annuity may give you some added diversification and/or reduce the time spent managing your portfolio, but I would have meaningful doubts about an annuity actually improving the viability of your financial plan.

The other reservation I have is that if we see a pick up in inflation it will be easier to protect youself with a portfolio of bonds/equities/cash/real estate than a fixed annuity.

Also important for some (not all) of us, without the annuity I can leave something for my [-]children [/-]cat.

I think the bold is a good point. "Very" early retirees usually have lots of cushion. Like any insurance product, if you've got enough money you can probably come out better self-insuring.

I rejected the idea of an annuity when I retired. But, my spreadsheet has a column that holds the premium for an annuity that would provide my minimum required income. If my assets ever drop low enough to get close to that column, then I may use an annuity as a bail out strategy.

 

[FIREd]

While annuities may have their place in retirement planning (and I wished I could actually find someone offering them on reasonable terms out here), they are of limited use for early retirees due to the extended expected duration. If you FIRE early enough, annuities will be too expensive to consider. Almost by definition, if you can afford to retire at an age when annuities are too expensive to be viable, then you should have enough to see you through retirement without them.

I thought Milevsky's point was that if you find annuities too expensive (I assume at any age) then you don't have enough to retire.

From the article:

More importantly, a life annuity should not be viewed as just another (expensive) way to finance a retirement income or, worse yet, as just one possible tool in a growing arsenal of products. Rather, the annuity price is actually a market signal of what retirement really costs. And, it is the cheapest and safest way to convert a nest egg into a lifetime of secure income. Market prices convey information and the cost of a life annuity is a hard-drive full of intelligence.

This is how I interpret this paragraph: the fact that annuities are expensive means that retirement is an expensive proposition right now. It's a sign that retirees will have to accumulate more assets and/or withdraw less each year in order to stay retired over their lifetime. If the TSP calculator above is any indication, current annuity rates signal that SWRs will have to be much lower than what we have been accustomed to. For example, the TSP calculator points to a 1.6% SWR for me. That's much lower than what I get with FIRECalc. Uh-Oh.

 

[MichaelB]

I thought Milevsky's point was that if you find annuities too expensive (I assume at any age) then you don't have enough to retire.

This is how I interpret this paragraph: the fact that annuities are expensive means that retirement is an expensive proposition right now. It's a sign that retirees will have to accumulate more assets and/or withdraw less each year in order to stay retired over their lifetime. If the TSP calculator above is any indication, current annuity rates signal that SWRs will have to be much lower than what we have been accustomed to. For example, the TSP calculator points to a 1.6% SWR for me. That's much lower than what I get with FIRECalc. Uh-Oh.

That was my understanding as well, with a caveat; you don't have enough to retire "risk free".