One more time, variable annuities....

[Art G]

State insurance pools are just pools. To my knowledge there isn't any state the "guarantees" the policies beyond the pool. The FDIC is "full faith and credit" for the US so they'll print money as needed to guarantee insured deposits. States don't have that luxury and their insurance is limited. I can't see a state having a budget crisis to back annuities. This is especially true since if insurance companies are failing in large numbers they are already in a budget crisis.

The other thing I don't think is covered is all the "extras" on the fancy VAs. I believe the "no loss guarantee" is just between the policy holder and the company. The funds within the VA are held just like at any brokerage house so a failed insurance company wouldn't lose the funds. The equity value may be higher or lower but that's all. I don't think all the other features are guaranteed. I'm sure if they are someone will pop in.

This is a good post to discuss. First off, while FDIC exists and supposedly insures your money, I still haven't found a definitive as to how much time they have to repay the losses. Brokerages have SIPC which as far as I can tell is a hair safer than FNM.
As to the VA's, supposedly there are State pools in place, although, they are not to be discussed or used as assurances. While your portfolio is a separate acct. from the insurance company and still yours even if the insurer goes under, as far as I've been able to gather, the guaranteed features are left up to the disgression of whoever takes over the policy, so, the "guarantees" really are a misnomer.
As I've stated around here numerous times, it's very important to select a strong insurance company (whatever that means?), and to spread around your money over more than one product and/or company.

IF the guarantees hold up, then in my opinion, there is nothing I could have offered greater than this product, at least in this market environment. For about 2%, I just prevented about a 35% loss. When you consider it, this is a much larger insurance protector than what you'd have on any car over two years old.

To zathras, this just doesn't strike me as the best way to start off a point....

I think that is a large part of your problem Art

 

[Zathras]

To zathras, this just doesn't strike me as the best way to start off a point....

You are correct Art, that was poorly worded.
I should have said 'I think a large part of the reason you are getting so much resistance in this forum...'

Did you read the rest of the post? I believe the point is valid. Others also raised the same point. For most people in this forum 4% is enough for retirement planning.

 

[2B]

Outside of this forum, how many folks do you think need more than 4% withdrawal, maybe 75% of most Americans?? I think you are overgeneralizing that folks that don't end up FIRED at a 2-3% withdrawal rate are lesser people than the folks on here.

If you do the math for the general population, most can never retire at their current standard of living. The fact is that about 50% of those over 50 will be forced into "retirement" by either their poor health or of a family member or job loss without being able to find a comparable position. Boomers won't have the retirment their parents have/had. I once read that the "greatest generation" is the first and probably last generation in history to generally have a comfortable retirement -- and their children paid for it.

As for retiring on a 2 to 3% withdrawl rate, that shows very poor planning. That indicates that they delayed retirement unnecessarily or aren't spending enough. I plan on pushing the 4% (maybe 5%) early in retirement but be able to still be comfortable on a much lower spending level if equities seriously underperform. I'll just cut down on luxuries and/or travel. If the market takes off (oh, please), I'll do more traveling.

 

[FinanceDude]

If you do the math for the general population, most can never retire at their current standard of living. The fact is that about 50% of those over 50 will be forced into "retirement" by either their poor health or of a family member or job loss without being able to find a comparable position. Boomers won't have the retirment their parents have/had. I once read that the "greatest generation" is the first and probably last generation in history to generally have a comfortable retirement -- and their children paid for it.

My parents already informed me that they have gotten MORE out of SS than they paid in, and now are living on "extra money"........

As for retiring on a 2 to 3% withdrawl rate, that shows very poor planning. That indicates that they delayed retirement unnecessarily or aren't spending enough. I plan on pushing the 4% (maybe 5%) early in retirement but be able to still be comfortable on a much lower spending level if equities seriously underperform. I'll just cut down on luxuries and/or travel. If the market takes off (oh, please), I'll do more traveling.

That sounds more like it. My plan is to have enough "fudge factor" to overcome a market hiccup like recently, but NOT have to cut out the fun.......

 

[harley]

As for retiring on a 2 to 3% withdrawl rate, that shows very poor planning. That indicates that they delayed retirement unnecessarily or aren't spending enough. I plan on pushing the 4% (maybe 5%) early in retirement but be able to still be comfortable on a much lower spending level if equities seriously underperform. I'll just cut down on luxuries and/or travel. If the market takes off (oh, please), I'll do more traveling.

I'm not sure that a 2-3% witdrawal represents bad planning. Could be ultra-conservativism, or just a lucky streak of investing that leaves you more money than you need to live the life you choose. Could also be the result of an inheritance that occurred after you made it to your 4% level. Many possibilities, and I would consider it a nice bonus to have that flexibility, especially in these financial rollercoaster times.

 

[Art G]

You are correct Art, that was poorly worded.
I should have said 'I think a large part of the reason you are getting so much resistance in this forum...'

Did you read the rest of the post? I believe the point is valid. Others also raised the same point. For most people in this forum 4% is enough for retirement planning.

I'm sorry, but I can't agree with you. So consider the currently retired, if they were getting 4% out of their portfolio, how much must they now get if they're down say 25%? Even a conservative portfolio is down today.

 

[FinanceDude]

I'm sorry, but I can't agree with you. So consider the currently retired, if they were getting 4% out of their portfolio, how much must they now get if they're down say 25%? Even a conservative portfolio is down today.

They're going to eliminate travel, eat 25% less, chop wood for heat, and live in their cars.......

 

[Rich_by_the_Bay]

My plan is to have enough "fudge factor" to overcome a market hiccup like recently, but NOT have to cut out the fun.......

Nice plan and more power to ya' if you can pull it off.

What is happening now seems more like projectile vomiting than a hiccup.

Short of having 50 x expenses in your nest egg (or one of the last great pensions), it's a pretty tough fudge factor number to attain for most.

 

[Canadian Grunt]

I'm sorry, but I can't agree with you. So consider the currently retired, if they were getting 4% out of their portfolio, how much must they now get if they're down say 25%? Even a conservative portfolio is down today.

I Agree,

I had this argument several months ago. I included facts, reports, etc.

I keep harping at this fact as a public service but I get a lot of resistance as though I was a heretic. Additionally, the portfolio will be severely depleted during a long bear.

Couple severe portfolio depletion that with 40-50 year time horizons and I fear there will be some misery to come without a second sober look at the reality of very long retirements.

The alternative is a reduced lifestyle to ensure capital (shares) are retained for the recovery, whenever that occurs.

 

[FinanceDude]

Nice plan and more power to ya' if you can pull it off.

What is happening now seems more like projectile vomiting than a hiccup.

Short of having 50 x expenses in your nest egg (or one of the last great pensions), it's a pretty tough fudge factor number to attain for most.

Hey, there's always winning the lottery.....

 

[Zathras]

I'm sorry, but I can't agree with you. So consider the currently retired, if they were getting 4% out of their portfolio, how much must they now get if they're down say 25%? Even a conservative portfolio is down today.

That is what is so nice about dividends. I get 4% (3.95%) and the number of shares I hold remains the same.
My portfolio is down about 25% now probably. I am getting paid the same amount I was last year (a little more actually) without considering the new shares I have bought during the year.

Again, this isn't the only way to do it, but it is a way that works for me and it is FAR better (again, for me) that paying 2% to have an allowance.

 

[FinanceDude]

That is what is so nice about dividends. I get 4% (3.95%) and the number of shares I hold remains the same.
My portfolio is down about 25% now probably. I am getting paid the same amount I was last year (a little more actually) without considering the new shares I have bought during the year.

Again, this isn't the only way to do it, but it is a way that works for me and it is FAR better (again, for me) that paying 2% to have an allowance.

As long as those companies don't cut their dividends it will probably work. If you needed a 5-6% withdrawal rate like most folks, it wouldn't work.......

 

[Zathras]

True, I don't think you could safely support a 5 or 6% withdrawal rate on dividends.
As for cutting, one company cutting won't kill the system as long as the others follow the typical dividend growth AND you are diversified.
Perhaps most folks that aren't on this board do need more (I wouldn't be surprised at all if that were the case). But it appears most people on this board are planning for 4% or even less.

 

[Canadian Grunt]

My parents already informed me that they have gotten MORE out of SS than they paid in, and now are living on "extra money"........


On the last debate McCain actually admitted SS was broken and benefits would have to be reduced. Considering the US reluctance for tax reform I would bet on reductions rather than increased payments like we did years ago with the Canadian Pension Plan, which is now funded for the next 75 years.

SS in its current form will probably not be there in 10 years.

 

[Art G]

That is what is so nice about dividends. I get 4% (3.95%) and the number of shares I hold remains the same.
My portfolio is down about 25% now probably. I am getting paid the same amount I was last year (a little more actually) without considering the new shares I have bought during the year.

Again, this isn't the only way to do it, but it is a way that works for me and it is FAR better (again, for me) that paying 2% to have an allowance.

I'm not sure why you're not seeing the flaw. 4% yesterday is 6% today. However, let's just use your hopeful theory that your companies never ever cut their dividend. So 20 years from now, do you think your expenses will be the same? What about inflation? If you did have to sell some stock, you'll now need at least that 6% dividend or more to regain your current income. Your theory just doesn't hold in the long run, you need growth. So, unless you have additional windfalls, your buying power will drop way off.

 

[Art G]

True, I don't think you could safely support a 5 or 6% withdrawal rate on dividends.
As for cutting, one company cutting won't kill the system as long as the others follow the typical dividend growth AND you are diversified.
Perhaps most folks that aren't on this board do need more (I wouldn't be surprised at all if that were the case). But it appears most people on this board are planning for 4% or even less.

I'd guess that most people around here figuring on 4% income, also factored in a particular growth rate of the market. Many on here throw around numbers, but what percentage are actually living it AND factoring for the future? I'd like to know what percentage are actually retired on that number and what percentage are still working toward that number?
BTW, those with a pension can't be considered in your figuring, that's an annuity.

 

[donheff]

We have discussed this 4% deal ad infinitum. People who retired years ago on a 4% SWR did so knowing that under many (probably most) possible scenarios they would go through a steep drop and a prolonged bear during the course of their retirement. Theoretically they can keep ratcheting up their annual take for inflation and the market will eventually turn around and save them. Most proposed to take some sort of modified approach in the event of a downturn (e.g. Guyton). Those people are cutting back a bit now (at least not increasing withdrawals for inflation). For anyone who retired recently this big of a downturn means they would clearly be withdrawing at more than 4% this year if they keep their lifestyle relatively consistent. If the downturn is not substantially worse than any in history they will be OK. If it turns out to be some serious black swan - without historical precedent - well, hold on tight.

 

[Art G]

don, thanks for a clarification. One question though, are these people holding cash, so they can take advantage of the downturns, or when you say 4%, does this mean that all of their money must be invested at a 4% average vs. say getting 6% on investments and 2% on cash?

 

[donheff]

don, thanks for a clarification. One question though, are these people holding cash, so they can take advantage of the downturns, or when you say 4%, does this mean that all of their money must be invested at a 4% average vs. say getting 6% on investments and 2% on cash?

People are all over the lot but from the conversations it sounds like most people are holding a diversified portfolio with US and international stock funds, some Reits and commodities, and some bonds. Many people are holding several years of cash or cash equivalents that they will be hitting this year. The portion in equities varies significantly.

 

[Zathras]

I'm not sure why you're not seeing the flaw. 4% yesterday is 6% today. However, let's just use your hopeful theory that your companies never ever cut their dividend. So 20 years from now, do you think your expenses will be the same? What about inflation? If you did have to sell some stock, you'll now need at least that 6% dividend or more to regain your current income. Your theory just doesn't hold in the long run, you need growth. So, unless you have additional windfalls, your buying power will drop way off.

Art, have you ever looked into dividends?
The idea behind the process is that you find good, solid companies with long records of dividend growth.
The rate of the dividend growth outpaces inflation, typically by quite a bit.
And thanks to diversification, it doesn't fall apart if one of your dividend payers cuts their dividend (unless you lump it all with one company).
The norm is that people keep a short term cash fund (CDs, MM accounts, etc) that will last them for a time so they don't have to sell into a down market. With dividends on top of the cash fund, it is extremely rare for this to happen. Sure, it can happen, and you can get hit on the head by a falling rock.
Buying power actually increases and the portfolio does as well along with the rest of the stock market.
And yes, this works better the less a percentage you need each year. If you have a smaller portfolio or need to live more lavishly this won't work so well. All systems have their sweet spots.

 

[2B]

Living on 4% covers a lot of ground. If you need 4% to have basic food, clothing (from thrift store), medical (medicaid?) and living expenses you have a problem due to no flexibility. My plan is that these can be covered by about a 1.5 to 2% but the quality of life is the other money that is hopefully available with a higher withdrawl rate.

I'm down this year about 25%. I'm about where I was in 2002 or 2003 and maybe all the way back in 1998. I don't know for sure because I didn't incorporate my 401k into my Quicken accounts until 2002. If I lost my j*b tomorrow (a real possibility), I can maintain my current lifestyle indefinitely. I could even have a reasonable travel budget. This is all assuming the market doesn't fall another 40%. Then I'd move closer to the minimalist existence noted above.

I think it's safe to say that if the cumulative stock market fall was 80% it's very likely any stinkin' annuities wouldn't be worth much either. My several hundred rounds of ammunition would be worth more than the rest of my portfolio.

 

[Art G]

Art, have you ever looked into dividends?
The idea behind the process is that you find good, solid companies with long records of dividend growth.
The rate of the dividend growth outpaces inflation, typically by quite a bit.
And thanks to diversification, it doesn't fall apart if one of your dividend payers cuts their dividend (unless you lump it all with one company).
The norm is that people keep a short term cash fund (CDs, MM accounts, etc) that will last them for a time so they don't have to sell into a down market. With dividends on top of the cash fund, it is extremely rare for this to happen. Sure, it can happen, and you can get hit on the head by a falling rock.
Buying power actually increases and the portfolio does as well along with the rest of the stock market.
And yes, this works better the less a percentage you need each year. If you have a smaller portfolio or need to live more lavishly this won't work so well. All systems have their sweet spots.

Again, I would beg to differ with you. I can pretty much assure you that I speak on a regular basis with more investors than you, so allow me to offer a different scenario.
First off, long before VA's began offering living benefits, I put my very own mother into a collection of quality preferreds, REITS, and bonds, and mutual funds. You see, she needed some growth, but mostly a need for income and unfortunately 4% wouldn't do the trick. Now, her account had been doing quite well for many years. REITS had performed well and the preferreds had held steady, and her mutual funds also had grown. However, in the last year or so, her acct. has tanked. Selling would just mean replacing her investments with riskier ones as she still needs the income. So to answer your question, yes, I'm quite familiar with dividends.
Now, as to your quality companies, you mean like GM, GE, C and F?
The bottom line is this, your scenario was based on the common ebbs and flows of the market place. My concerns are with the overall preservation of wealth and income for life.
At this moment, your strategy is failing miserably. Mine hasn't yet, but just may. I can't afford the luxury of telling people to sit tight and things just may work out alright. Good luck to us all.

 

[Art G]

I think it's safe to say that if the cumulative stock market fall was 80% it's very likely any stinkin' annuities wouldn't be worth much either. My several hundred rounds of ammunition would be worth more than the rest of my portfolio.

Gotta' agree with that. Kind'a scary.

 

[Canadian Grunt]

Again, I would beg to differ with you. I can pretty much assure you that I speak on a regular basis with more investors than you, so allow me to offer a different scenario.
First off, long before VA's began offering living benefits, I put my very own mother into a collection of quality preferreds, REITS, and bonds, and mutual funds. You see, she needed some growth, but mostly a need for income and unfortunately 4% wouldn't do the trick. Now, her account had been doing quite well for many years. REITS had performed well and the preferreds had held steady, and her mutual funds also had grown. However, in the last year or so, her acct. has tanked. Selling would just mean replacing her investments with riskier ones as she still needs the income. So to answer your question, yes, I'm quite familiar with dividends.
Now, as to your quality companies, you mean like GM, GE, C and F?
The bottom line is this, your scenario was based on the common ebbs and flows of the market place. My concerns are with the overall preservation of wealth and income for life.
At this moment, your strategy is failing miserably. Mine hasn't yet, but just may. I can't afford the luxury of telling people to sit tight and things just may work out alright. Good luck to us all.

If you buy ETF's or funds that produce dividend income you will be sheltered from the fall in the market much more than growth stocks. Dividend paying stocks historically do much better than growth stocks during recessions and during the Great Depression were most likely to survive. Your argument doesn't hold water.

Additionally, you should get some tax preference off the dividends. If you could survive on the dividend stream at the start of a recession you should be comfortable throughout.

Recessionary pressure actually reduces prices so the CPI should remain stagnant or decrease so inflation won’t be a killer.

Good quality stocks that pay dividends form streams of income are much less likely to fold than stocks that are priced based on future growth. Which stocks do you think will get hit the hardest?

Cherry picking companies for comparison like GM does not water down the fact that dividend stocks produce in recessions. Historically, they hold up better and rebound faster. Your facts are wrong.

The key is to hold a broad based fund of dividend paying stocks and keep to your desired asset allocation based on your risk tolerance.

If you have cash, are not retired, and are not worried about losing your job, now is the time to get dividend paying stocks because they are paying great dividends.

 

[Zathras]

The bottom line is this, your scenario was based on the common ebbs and flows of the market place. My concerns are with the overall preservation of wealth and income for life.
At this moment, your strategy is failing miserably.

Nonsense. My scenario is based on the long term growth of a broad group of strong companies. It IGNORES the ebb and flows of the market. Couldn't care less.
Canadian Grunt spelled out the key pretty darn well so I won't just repeat what he said