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Old 01-14-2016, 08:03 AM   #61
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one element of risk that would bother me is the idea of forking over all of that money to one company, that could go belly up along the way. That is about as undiversified, as you can get.
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Old 01-14-2016, 08:07 AM   #62
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even 2008 did not see one annuity or life insurance policy holder lose a penny .

even aig's annuity and life insurance business was rock solid and had nothing to do with aig's credit default swap business that needed a bail out .
they are totally isolated company's.

most states require healthy insurers to take over the client base of a failed insurer .

states also offer guarantees up to a limit .

if we have mass failings of insurers who depend on dead body's as much as financial instrument returns then i would say your portfolio will have a whole lot more to worry about .

if i decided to do them i would ladder spia's from a few company's .
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Old 01-14-2016, 08:56 AM   #63
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over time you still need to liquidate those bonds to replenish cash . so if holding until maturity in effect you are the bond fund . .

a total bond fund is more like what you would have to hold , about 25% short term , 25% long term and the rest in the middle .
The differences is bond funds buy/sell all of the time which makes them subject to potential annual losses. Assuming something like treasury bonds which can't default and you hold to maturity, you can't experience a loss. Not sure why other than convenience, but there are actually some bond funds that do that now..
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Old 01-14-2016, 09:03 AM   #64
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i think the fact that if they are buying and selling their yields are improving over just sitting to maturity .

in your case to refill you would need to hold 1 year , 2 year 3 year ,etc ladders because if you don't you would have also sell before maturity to create cash flow .

that mix may have a lower yield then the fund manipulating their portfolio off setting any losses .

in the end i think it would be to close to matter just because you on your own need to ladder every year . don't forget your interest rates stay fixed forever on what you hold ,. as rates rise the funds yield rises .
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Old 01-14-2016, 09:10 AM   #65
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In CA, life insurance and annuities from the are insured up to $250K for single and $320K per couple ($160K each). At 6% cashflow rate, that's good for $1.25-1.6K/month.

If I wasn't expecting pension, I would do the same as mathjak and build an annuity ladder (from different companies of course).
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Old 01-14-2016, 03:50 PM   #66
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How would an annuity ladder be built. How would it work?
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Old 01-14-2016, 03:52 PM   #67
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well i would start around 70 . i would take the amount of money allocated and put a piece in each year .

THE OLDER YOU ARE AND THE HIGHER RATES THE MORE YOU GET .

that is an important thing to know
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Old 01-14-2016, 05:19 PM   #68
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well i would start around 70 . i would take the amount of money allocated and put a piece in each year .

THE OLDER YOU ARE AND THE HIGHER RATES THE MORE YOU GET .

that is an important thing to know
You could do a similar thing at a younger age if you think general interest rates are going to be rising.
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Old 01-14-2016, 05:21 PM   #69
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it does not pay to start to young because rates are to low and the longer you wait the more the guaranteed payment . yeah you could collect a few more checks but in the end like social security waiting pays if you live . since buying an an annuity is a bet you will live i would go with waiting .
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Old 01-14-2016, 06:09 PM   #70
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The people (well, advertisers) who attack annuities without regard to the many different annuity types and the widely varying fees that get charged seem to always be pitching some alternative product, instead of sincerely warning investors away from high fees in general.

A quick search for Ric Edelman (company is EMAP) fees yields a fee schedule within the Google search result showing that a high six figure nest egg would be subject to an annual AUM fee of about 1.8% (the fees for higher level increments to the invested amount are lower than for the initial amount of $200K). This is particularly stunning in view of EMAP's general guidance to invest in low expense-ratio ETFs.

This prompts the question as to whether it's really better to shift from high-fee annuities to high-fee stock/bond fund investments. Well, it's better for the company offering this approach, but likely no better for the consumer.

A properly backed, and suitably priced, immediate annuity strikes me as being a perfectly valid retirement financing vehicle, so long as investors bear the risks in mind and elect a suitable allocation accordingly. Annuities can be used to smooth out the volatility present in stock/bond portfolios while providing income that lasts exactly as long as the retiree does.

Lastly, I believe that the above statement that COLA adjusted annuities are not available is simply untrue. They are less common than they used to be, but can still be found. I have used the Vanguard platform several times to price inflation adjusted annuities, though in the last few months.

Whether the inflation rider is wortwhile or not is a tough one. It depends on what expectations for future inflation are. If you expect low inflation, then current rates for COLA adjust annuities won't appear worthwhile. The current TIPS rates could be criticized for the same reason. However, people still buy them, because they guarantee something that is otherwise uncertain.

The security of the insurance companies (and of the underlying guaranty associations) that offer immediate annuities is a legitimate issue. However, I don't think that vendors of competitive financial products are a reliable source of information on this subject, as they have a vested interest in steering people towards alternative products that have their own fee structures and their own risk levels.
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Old 01-14-2016, 06:10 PM   #71
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Could you explain how you modeled the SPIA? Specifically--how is the SPIAs "value" accounted for in the ending figures (since the money isn't owned by the retiree, he only has claim to the remaining annual payments, which won't be many for a 100 YO recipient). At the end of 40 years, the SPIA in Scenario 2 is worth very little, (even moreso if he dies before the 40 years, the SPIA value becomes zero, barring any "certains")and the bonds in Scenario 1 should be worth quite a bit. They both started with the same amount of stocks, maybe any higher terminal value of Scenario 2 is because the stocks weren't tapped as much to pay out withdrawals due to the higher "yield" of the SPIA (compared to the bonds in Scenario 1)?
The SPIA value is not in the ending figures... the SPIA benefits offsets the annual withdrawal for $6k a year (fixed benefit while expenses grow with inflation so the initial $2k withdrawal grows with inflation on expenses).

Note that the terminal values include all retirement assets (both bonds and stocks) so they are comparable.

Yes, I suspect as you suggest that part of the reason for the higher terminal values is that the first year withdrawal for stocks is only 2% so the equities grow with compounding and mitigate stress for bad sequence of return scenarios.

Given that my fixed benefit pension is about 20% of our spending and our SS is ~50% of our spending I'm not inclined to buy a SPIA but I may consider it at some point. We have enough belt tightening in our spending that I could close a lot of the 30% gap if I wanted to.
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Old 01-14-2016, 06:33 PM   #72
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we are pretty close , ss will be about 40% if we wait until 70 , small pension about 15%
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Old 01-14-2016, 08:36 PM   #73
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we are pretty close , ss will be about 40% if we wait until 70 , small pension about 15%
mathjak, only because you make reference to your waiting until you are 70, may I ask how old you are now, and how long you have been retired?

I apologize if this in an inappropriate question to ask on the forum.
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Old 01-14-2016, 09:08 PM   #74
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it does not pay to start to young because rates are to low and the longer you wait the more the guaranteed payment . yeah you could collect a few more checks but in the end like social security waiting pays if you live . since buying an an annuity is a bet you will live i would go with waiting .
The age to annuitize is a personal thing and will reflect the attitude towards risk and the makeup of your income stream. Whether it pays or not is very tied up with perception and many unknowns.......but you might well say that an early annuity that allows you to reinvest dividends from your stock mutual funds over a longer time period might work out better than waiting in some scenarios.
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Old 01-14-2016, 11:16 PM   #75
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The age to annuitize is a personal thing and will reflect the attitude towards risk and the makeup of your income stream. Whether it pays or not is very tied up with perception and many unknowns.......but you might well say that an early annuity that allows you to reinvest dividends from your stock mutual funds over a longer time period might work out better than waiting in some scenarios.
+1. Also, if using tax deferred to buy SPIA to fund the early years, you also reduce your RMDs (unless equities do really, really, really well in which case, you've got a positive problem).

Granted, going stock/SPIA is likely similar to going stock/bond with rising equity glide path.
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Old 01-15-2016, 03:03 AM   #76
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mathjak, only because you make reference to your waiting until you are 70, may I ask how old you are now, and how long you have been retired?

I apologize if this in an inappropriate question to ask on the forum.
i am 63 and my wife 65 . we have been retired 6 months . can't you tell , markets fell the next day .
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Old 01-15-2016, 05:11 AM   #77
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The age to annuitize is a personal thing and will reflect the attitude towards risk and the makeup of your income stream. Whether it pays or not is very tied up with perception and many unknowns.......but you might well say that an early annuity that allows you to reinvest dividends from your stock mutual funds over a longer time period might work out better than waiting in some scenarios.
i think the wild card is rates . if it was just an age thing i would agree . but you have two moving targets and because of that the increases between age and rates may do way better then markets.
it does not look like markets may do much the next couple of years as a guess so waiting and growing the annuity amount may be the best deal . .
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Old 01-15-2016, 05:26 AM   #78
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i am 63 and my wife 65 . we have been retired 6 months
Thanks. Here's my situation: I am 62, will be completely retired March 1.
Wife is 58, will continue to work, makes 36K/year.

I've been self-employed my whole life, DW worked for me, now works for my successor. I've managed my own pension assets, eventually finding my way to being a solid Bernstein devotee.

I've never been keen on annuities, but now that I am stepping from "accumulation" to "spend-down" I notice my mindset changing.

Minimal WR, my floor that would allow us to continue current lifestyle once wife stops working and gets her SS, is less than 1%, and the WR that allows for us to do what we want in retirement is less than 3%, of CURRENT ASSETS...

So it looks like I could consider annuitizing nothing at all, or the 1% floor, or the 3% , and then still have some funds left over to manage, just for more gravy.

Might take a bit of the worry out of the game.

Lots to consider here.
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Old 01-15-2016, 05:46 AM   #79
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Pfau came up with a similar result when he compare stock and SPIA portfolios to stock and bond ones. This is why I've taken the approach to buy into a pension plan starting at 55 so that I can have a high stock percentage that i will allow to increase over time.
Yes, this is the position I am in. (Really attributed to luck rather than good planning). My very generous pension is "worth" (NPV basis) about 65% of my investment portfolio (100% equities) so my notional AA is 60/40 equities to FI. I think this must be close to optimal as my pension and divs cover our spending. For the reasons mentioned above, an annuitized cash flow stream is a very advantageous thing if you can get it at a reasonable cost. In some ways better than a FI component in your portfolio.
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Old 01-15-2016, 06:48 AM   #80
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Yes, this is the position I am in. (Really attributed to luck rather than good planning). My very generous pension is "worth" (NPV basis) about 65% of my investment portfolio (100% equities) so my notional AA is 60/40 equities to FI. I think this must be close to optimal as my pension and divs cover our spending. For the reasons mentioned above, an annuitized cash flow stream is a very advantageous thing if you can get it at a reasonable cost. In some ways better than a FI component in your portfolio.
I'm using 18% of my investment portfolio to buy into my pension plan. It's COLA'ed and assuming a 2% annual increase and an average life span the associated interest rate is 7% so it's good for longevity insurance and investment return. It even has a survivor benefit that costs $30/month that leaves a lump sum to a designated beneficiary.

My pension starts at age 55 (this year) @ $20k/year and with $15k I get in rent my basic expenses are covered. At 66 I expect $20k from US SS and another $20K from UK SS, so I won't be exactly rich, but I should be comfortable without taking anything from the rest of my portfolio.
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