Milevsky: What Does Retirement Really Cost ?

[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]

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Originally Posted by FD 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]

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Originally Posted by youbet 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]

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Originally Posted by MasterBlaster 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]

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Originally Posted by youbet 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]

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Originally Posted by Nords 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]

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Originally Posted by traineeinvestor 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]

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Originally Posted by traineeinvestor 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:

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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]

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Originally Posted by FD 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".

[FIREd]

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

Point well taken even if I don't consider annuities risk free.

[MichaelB]

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Originally Posted by FD Point well taken even if I don't consider annuities risk free.

Of course. I didn't mean to imply he was correct in that view, just that his point was there was a risk of inadequate investment return in equities but not annuities.

A well run pension fund would not have a zero risk portfolio.

[youbet]

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Originally Posted by FD the TSP calculator points to a 1.6% SWR for me. That's much lower than what I get with FIRECalc. Uh-Oh.

Would you mind sharing what parameters you inputted when you obtained the 1.6% output? I'd like to double check that I'm using this tool correctly.

[FinanceDude]

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Originally Posted by Nords 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.

I believe Vangaurd is still selling their annuities through AIG, or did they drop them after the bailout?

[FinanceDude]

There is no "magic potion" in SPIA or immediate annuities, COLA or not. The companies that offer them are in it to make money.

SPIA monthly payment rates are all over the map.

[FIREd]

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Originally Posted by youbet Would you mind sharing what parameters you inputted when you obtained the 1.6% output? I'd like to double check that I'm using this tool correctly.

Joint life with spouse
Increasing payments
No cash refund
50% survivor benefit
Ages: 37 and 37

[youbet]

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Originally Posted by FD Joint life with spouse Increasing payments No cash refund 50% survivor benefit Ages: 37 and 37

Thanks. OK, I'm getting your output when I use your inputs so I guess I'm filling in the fields correctly.

I was just curious because with our geezer status (64 yo) we're inputting 65 yo as the beginning point with a 100% survivor benefit and getting 3.6% output. Age obviously makes a big difference.

I find it interesting that the 3.6% is about my planned WR with FireCalc showing an historical 100% success rate beyond 100 yo at that level. So it looks like I could cash in the portfolio, buy a cola'd annuity (3% limit so there's still some inflation risk) and eliminate the investment risk inherent in my 50/50 portfolio while keeping the same income. Of course, I also give up control of my money and the high probability of my heirs getting an inheritance.

It would certainly be easier to deal with these decisions if one knew his life expectancy, future investment returns and future inflation rates instead of having to guess.

Congrats on being ER'd at 37. I worked 2 long, long decades after that!


Edit: Regarding my "cash in the portfolio" comment above, I suppose I'd have to take taxes into consideration. A significant chunk of my FIRE portfolio is LTCG's and I'd have to pay taxes on that before turning it over to the annuity salesguy. So I guess my income would drop somewhat.

[rescueme]

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Originally Posted by youbet Age obviously makes a big difference.

Sure it does. It's no different than SS. The longer you wait to start, the less years it is expected to pay out, thus resulting in higher monthly payments.

BTW, it has little to do with current interest rates as far as the monthly benefit paid as some folks think (I'll wait, since I'll get a higher return...)

BTW, it's simple to calculate the return on any fixed-payment, life guaranteed SPIA just by using the XRR function on Excel. No charts needed...

[haha]

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Originally Posted by FinanceDude The companies that offer them are in it to make money.

Well, that settles that. i am glad that most American companies offer their goods and services as a gift to mankind.

Whew! I'm glad you warned me, I'll stay away from those capitalist annuity hawkers.

Ha

[rescueme]

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Originally Posted by haha Well, that settles that. i am glad that most American companies offer their goods and services as a gift to mankind. Whew! I'm glad you warned me, I'll stay away from those capitalist annuity hawkers. Ha