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Need some feed back!!
Old 02-17-2014, 08:26 AM   #1
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Need some feed back!!

Hola Amigos,
I am currently working on my asset allocation. I am trying to choose between to different portfolios, and I am going through the pros and cons from each. I also believe that inflation is like housing market location, location. 100 % of the money is IRA money for these 2 options. I also have an emergency cash money worth 10% portfolio, plus an additional 4 % in a Roth IRA.
Option I,
If I annuitize my portfolio and enter a 0 % return, this portfolio will have a life span of 30 years taking equal payments every year. The payments will not be adjusted for inflation since 5 years after the initial first payment; I qualify for a small pension that will add 25% to my monthly income. Few more years later, I can apply for social security and this adds 2nd increase to my income. I am hoping to spend every nickel and dime that I save before I kick the can.

2nd option,
This option will have a 1/3 in cash, 1/3 bonds, 1/3 stocks. The 1/3 cash is the equivalent of 10 years of living Spence’s. I will also be taking the pension money 5 years later and follow my social security.

Please let me know what you think!!

Speedy
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Old 02-17-2014, 09:05 AM   #2
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Just a suggestion..... put more info into your title about what kind of feedback you are looking for... most posts are asking for some kind of feedback and it is good to know what the subject matter is behind the title...


As far as an answer to your question.... you will get people on both sides...

But, are you suggesting that you buy an annuity That will get a strong negative response...
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Old 02-17-2014, 09:19 AM   #3
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Quote:
annuitize my portfolio and enter a 0 % return, this portfolio will have a life span of 30 years taking equal payments every year. The payments will not be adjusted for inflation since 5 years after the initial first payment;
Maybe I am misunderstanding your question, but an annuity that earns ZERO and is indexed to inflation ONLY for 5 years, is a terrible investment.

Most people who seriously consider annuities, do so for only part of their money. Once you have the annuity you are both committed (no changing your mind and redeploying assets) and dependent on the health of the company issuing the annuity. You should be able to do much better than a ZERO annuity, if you decide to go this route. In general, I strongly prefer to retain control of my assets, but that's a personal decision.
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Old 02-17-2014, 09:28 AM   #4
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+1 on using a descriptive thread title! It's one of my many pet-peeves, but I'll try to help anyway!


I'm guessing that when the OP said If I annuitize my portfolio and enter a 0 % return, it was just a math calculation? Which just seems to be saying the WR% is 1/30th. But that doesn't account for volatility, sequence of returns, killer inflation, etc.

I will suggest the numbers get plugged into FIRECalc or other historical calculator, for some reference points. In general, 33.3% in equities is getting to the point where history reports a real reduction in survival rates of the portfolio.

It also sounds like you are young enough that a 30 year horizon may be short sighted.

-ERD50
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Old 02-17-2014, 09:50 AM   #5
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Here is a little more information.

The fist option is just a comparison to an annuity with 0 % return. If I take all the money is this option place under the mattress and earn nothing and take equal payments every month this money can last 30 years. After the 5 year, I will take a pension that will increase my monthly income by 25%. This will bring the equivalent 3 times monthly expenses.

I will also have the extra 10% cash plus the 4 % in the Roth. I am just trying to balance the need for market exposure and peace of mind.

There is also the great possibility that my hobby will bring some extra cash.
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Old 02-24-2014, 02:10 AM   #6
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"We don’t recommend an allocation to annuities for ANY portion of your portfolio. We believe an age-appropriate allocation to bonds provides a similar boost to the likelihood you will have sufficient assets in retirement." -- Forbes Magazine
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Old 02-24-2014, 02:19 AM   #7
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Wow... I thought I was risk averse!

Sorry... I don't feel qualified to offer advice but keep posting and reading. There are lots of very helpful and knowledgeable folks here.

Good luck
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Old 02-24-2014, 04:24 AM   #8
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Inflation will erode the value of money over time. Over the long-term, inflation runs about 3.5% per year. Or stated another way, in 20 years everything will cost twice as much as it does now. For the past few years, it's been below this rate according to the CPI index, though I think food costs have been rising more than 3.5% per year.

As a conservative investment, you may want to consider creating a 5 year CD ladder. You won't get 3.5% per year, but at least you'll be close and your money is guaranteed to $250000 by the FDIC
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Old 02-24-2014, 11:39 AM   #9
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If you want to spend every dime before you die, then an annuity is probably your best bet. However, if you fully annuitize you won't have any portfolio available for emergency expenses.

I'd might try something like option 2, and then purchase single payment immediate annuities starting about age 70 or so. Say annuitize 10% of portfolio per year. This will give you some growth early on, allow you to annuitize later, when the benefits are stronger and inflation will have less impact, and retain a portfolio if that looks desirable at a later date or you kick off early. If you live past 90, you would be fully annuitized (I'd hold back 10% of portfolio for emergencies) and have guaranteed income for life which you could spend each year.
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Old 02-24-2014, 12:04 PM   #10
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Personally I would not buy the annuity. You will have lots coming in like clockwork already, with the pension and SS, so I don't think you really need it.

You never know when a serious illness or other emergency might make access to a large amount of money pretty urgent. With your money invested in a conventional stocks, bonds, and cash portfolio, you will have that flexibility. Also, AFAIK annuity rates have been really crummy in recent years.

Making the transition from a regular, predictable paycheck to retirement income from a portfolio can be a little scary for some of us prior to retirement. I know it was for me. But in practice it is not as difficult as you might think. I would suggest establishing a portfolio ("option 2") and trying that for a while before you consider an annuity.
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Old 02-24-2014, 03:10 PM   #11
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Annuities are a tax nightmare! Profit distributions will eventually be taxed at the higher ordinary income rate

No ability to strategically rebalance after market declines with SPIA's, fixed, indexed, immediate, etc.

So-called "advantage" of tax deferral is over rated and may be negated (and then some) by higher taxes

Distributions must be tightly controlled and kept to a minimum due to higher taxes

Extremely limited ability to use loses to write off taxable gains from annuity distributions (Only $3,000 per year).

Annuities are terrible for heirs. Great way to screw over your loved ones.
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Old 02-24-2014, 03:50 PM   #12
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I think OPs point re the annuity was that s/he has a WR of 3.33%. Not that s/he was actually thinking of buying one.

Am I reading this correctly that in 5 years you will receive a pension that will equal 3x your living expenses ? If that's so then the CD ladder is the safest bet and the only thing you'll have to worry about is what you are going to spend your money on !
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