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Old 12-06-2017, 05:15 PM   #21
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I am kind of a dumb guy on annuities, never having seriously considered one, but I'm curious to enhance my education by hearing comments on a couple of thoughts:

First, a "fixed" annuity is a myth. The value of the annuity payments constantly depreciates with inflation. Inflation over the past 30 years has averaged 4.1%. If this continues for the next 20, the buying power of a "fixed" $1000 payment will be $432. Looking back 45 years instead of 30 picks up a high (up to 15%) inflation period that will make 4.1% look like a gift. But when people talk about annuities they do seem to like the (IMO fictional) "fixed" aspect.

Second, to purchase an annuity is simply to pay someone else to take a risk that the purchaser doesn't want to take. The seller has to price the risk, add his costs to manage the annuity, and add enough profit to make the product worthwhile. In buying an annuity, though, the purchaser seems to rarely buy an annuity that also transfers inflation risk, which seems to me to be the biggest risk of all.

In formal risk management one evaluates three things: the potential impact of an event happening, the probability of that event happening, and the cost to mitigate. It seems like that same thinking should be used in evaluating an annuity purchase but people don't seem to approach it this way.
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Old 12-06-2017, 05:26 PM   #22
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This is also a good time to pay off any debt. I have been paying off low interest debt all year with my stock gains. I never bothered before because the interest rates were between 0 and 3% and I was in accumulation mode. Now that the market is so high, I have reached my networth targets and I am starting to think about retirement. Debt that did not bother me before now feels like the sword of Damocles hanging over my head!
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Old 12-06-2017, 05:44 PM   #23
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I plan to look into a SPIA without an inflation rider when I reach my 70s. I do not consider it market timing and Wade Pfau feels that SPIAs are better than bond funds in today's interest rate environment.

I will likely want a 100% continuation of the benefit for my wife though which I understand would reduce the monthly payments.

I retired this year at the age of 64 and 1/12 years old. I want to wait until my 70s to pick up additional mortality credits.
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Old 12-06-2017, 05:47 PM   #24
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Reasonable plan. I’m considering the same strategy. But in my case I would buy a SPIA to replace my alimony requirements. End result is the same, less equity in the AA but also more disposable cash flow to safely spend. In my case the critical metric is the Xwife’s age. She is currently 67 and each year I wait the cost should go down by about 3-4%.
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Old 12-06-2017, 06:35 PM   #25
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Things to think about:

1. 100% survivorship, obviously based on your situation, assume there is a reason for the 50% survivor vs some other arrangement even 20 year guaranteed payments (20 year period Joint Life) may be the same
2. SPIAs are commodities Vanguard's supplier is not always the cheapest, shop them, Immediate annuity, Call Stan the annuity man etc.....
3. Consider after tax $$ to control taxes if needed?

Based on your comments/defense of SPIA I think you should do it, perhaps by laddering (i.e. 90,000 now and 90,000 1 year from now)
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Old 12-06-2017, 07:30 PM   #26
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Breaking up is hard to do

Gave the instructions to the financial adviser yesterday to liquidate everything to cash.

The reason was two fold.
1) Poor performance on a 50/50 portfolio of only 6-7% aggregate or a bit over 2% annualized over a 3 year period most of that coming in the last 12 months.
2) I feel the market is going to sort things out over the next 60-90 days which sectors are going to do better or worse under the new tax plan.

I told him we will redeploy after 30-90 days. I'f I miss another 1/4% growth & earnings OK. If I miss 5-20% correction great!

He was arguing pretty hard to stay invested in the bonds, if I wanted to take some of the equities off the table and move them to bonds that would be good idea. When I said no to the bonds, he found me an ultra short cash fund paying 1.8% to have at least something coming in.
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Old 12-06-2017, 07:40 PM   #27
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1) Poor performance on a 50/50 portfolio of only 6-7% aggregate or a bit over 2% annualized over a 3 year period most of that coming in the last 12 months...
A 50/50 portfolio using 1/2 Wellesley and 1/2 Wellington would have returned around 22% in the last 3 years.

When you decide to get back in the market, do not give the money to this FA.
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Old 12-06-2017, 07:41 PM   #28
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... laddering (i.e. 90,000 now and 90,000 1 year from now)
Light bulb moment! This also allows purchase from two different insurers to spread the (hopefully slight) risk.

Thanks for the suggestion.
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Old 12-06-2017, 07:44 PM   #29
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Gave the instructions to the financial adviser yesterday to liquidate everything to cash.
.....

I told him we will redeploy after 30-90 days.
Hope you're still a member in good standing of your Club at the end of this process.
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Old 12-06-2017, 10:11 PM   #30
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True.

Spending down the portfolio to zero is not a problem if the portfolio stays what it is today. It is a potential problem if it takes a big haircut in the next year or so and is slow to bounce back.

I've found I'm less enthusiastic about riding the market roller coaster in my 70's than I was in my 60's. That leads me to believe I will be even less enthusiastic about doing it in my 80's - assuming I'm still topside.
Wow, I never thought I'd see this post from you.

I'm 74 and feeling nervous myself. But i have a couple of pensions which should fulfill a spia role. I have been reinvesting my rmds, but am wondering how much longer i should do that. I just bought a car, making very little dent in my stash. The grandkids are gonna love me after I'm gone.

Anyway, I guess the answer to your question is 2 cliches.

1. When you've won the game why keep playing.
2. Do whatever let's you sleep,at night.
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Old 12-06-2017, 10:39 PM   #31
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I also decided to do a minor tweak to our taxable portfolio. Taking out 1% to reduce HELOC debt by about 40%. HELOC is at 3.99% so I wasn't sure if it was a good move but FA encouraged it and since the $ was just sitting in cash/ST bonds, it wasn't earning 4%.
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Old 12-07-2017, 07:46 AM   #32
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OK, I'll admit it - the thread title might be a euphemism for market timing. ...

What do you think? Am I simply trying to disguise the fact I'm a DMT?
Oh, I think you can get away without the DMT label, if you plan it as a permanent change. Making AA changes with age isn't market timing, IMO, but a reasonable thing for some people (it's a personal decision). Planning a re-entry point might change that.


Quote:
Originally Posted by Luck_Club View Post
Gave the instructions to the financial adviser yesterday to liquidate everything to cash.

I told him we will redeploy after 30-90 days. I'f I miss another 1/4% growth & earnings OK. If I miss 5-20% correction great!

He was arguing pretty hard to stay invested in the bonds, if I wanted to take some of the equities off the table and move them to bonds that would be good idea. When I said no ...
So one of the points people will use in favor of having an FA, is that the FA will talk them out of leaving the market. And I always wonder, what would keep them from just going with their heart anyway? So here's an example, pay an FA, and then ignore his advice. I double-don't get it.

Market predictions on a 30-90 day basis? Well...

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Originally Posted by REWahoo View Post
Hope you're still a member in good standing of your Club at the end of this process.


-ERD50
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Old 12-07-2017, 12:22 PM   #33
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Hope you're still a member in good standing of your Club at the end of this process.
Confused on this comment.

My reason to liquidate was like someone else mentioned. Can afford to spend down to zero but can't afford a big haircut. Also, if the managed account was so poorly managed that it missed a big ride up, how confident am I they will protect on a big ride down>>>>>>

I can now get CD rates with 60 and 90 day terms that deliver similar time weighted returns, and none of the risk.
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Old 12-07-2017, 12:25 PM   #34
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A 50/50 portfolio using 1/2 Wellesley and 1/2 Wellington would have returned around 22% in the last 3 years.

When you decide to get back in the market, do not give the money to this FA.
I'm currently working very hard for him to produce a performance report for the last 4 fy. The reports available to me obfuscate all the financials. Could this be on purpose?
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Old 12-07-2017, 12:37 PM   #35
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I'm currently working very hard for him to produce a performance report for the last 4 fy. The reports available to me obfuscate all the financials. Could this be on purpose?
I was recently involved in selecting an FA for $4M of a small nonprofit's money. We ended up with an FA who is affiliated with LPL Financial. Their sample financial reports were the best I have ever seen. Equity performance and fixed-income performance in the portfolio are reported separately. So it is very easy to evaluate and benchmark.

In contrast, I was involved with another nonprofit who had been captured by a Morgan Stanley "Wealth Management" rep. One of the things the rep did was to hire a couple of stock-pickers and completely destroy the readability of the statements by including thirty or more minuscule stock positions. (The account was only $1M.) When the organization treasurer asked to break out the stock pickers into separate accounts so that their performance could be seen, the rep flatly refused. So, yes, obfuscation is a strategy for some reps and some organizations. But not all.
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Old 12-07-2017, 12:43 PM   #36
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Confused on this comment.
Aren't you in the "luck" club?
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Old 12-07-2017, 02:01 PM   #37
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I'm currently working very hard for him to produce a performance report for the last 4 fy. The reports available to me obfuscate all the financials. Could this be on purpose?
What do you think you need to know other than the target AA(s) for the account for those years, the XIRR based on cash flows for each year and the return for a relevant benchmark consistent with the target AA for each year.
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Old 12-07-2017, 02:41 PM   #38
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What do you think you need to know other than the target AA(s) for the account for those years, the XIRR based on cash flows for each year and the return for a relevant benchmark consistent with the target AA for each year.
Not speaking for the @Luck_Club, but for myself I try to tease out the equity-only performance so I can easily compare it to equity test portfolios that I am running and to things like Russell 3000 or ACWI all cap total return.

Looking at blended results can mask interesting things, like a very risky or a very conservative approach on the fixed income side or the effects of some really big swings of long investments as interest rates more.
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Old 12-07-2017, 03:30 PM   #39
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I've always told myself that at some point, always "when I get older", I might consider (can't believe I'm actually saying this) buying a SPIA. Well, I'm older (71) and I'm considering it.

What I'm thinking about doing is "harvesting" ~$175,000 from the growth of our portfolio over the past few years and purchasing a SPIA. That should provide ~$1,000/mo income with a 50% survivor benefit for DW.

Other pertinent facts:

- 92% of our annual income is derived from SS and investments
- 8% of our annual income is from DW's small pension
- The combined income from the SPIA, DW's pension and our SS will fund ~55% of our annual expenses.
- The remaining portfolio balance will be what it was when I retired in 2005.

What do you think? Am I simply trying to disguise the fact I'm a DMT?
REW-

The one thing I didn’t see mentioned was how the 55% of annual expenses compares to your “essential” expenses. I think that’s important because (at least for me) it relates pretty directly to my risk tolerance. And, at the bottom line, you seem to be considering a SPIA because of risk tolerance. Plus, even after purchasing the annuity, 45% of your expenses still have to be funded with a risk portfolio.

The other tool that I like to use when considering a SPIA is the ‘hurdle’ (see Fullmer) or ‘zone’ (see Otar) concept, which I’ve posted about several times, and which I’m sure you’re familiar with. These tools are good at telling a person/couple whether they’re in circumstances where they really ought to consider purchasing an annuity.

So, I’d consider these things before deciding:
1. What’s your goal for “guaranteed” income? Is it 100% of essential expenses, or less/more?
2. Are you really in a position where you need to partially annuitize, based on a specific metric (X% expenses covered by guaranteed income) or tool (hurdle or zone concept)?
3. Does the $177k annuity make an essential difference in your overall FI picture in a dramatically down market?
4. Are there other tools (CD ladder, laddered SPIAs, etc.) that get you most of the risk reduction you seek without giving up principal?

FWIW, my current answers (62 yo) to my own questions are:
1. My goal for guaranteed income is to cover 100% of essential expenses.
2. I use the hurdle & zone concepts, and am not currently in a position where annuitization is required.
3. I would be most likely to consider a SPIA at ~70 yo, and would seek to achieve goal #1 above.
4. We currently carry 4-5 yrs of cash/equivalents, and are hoping that SPIA payout rates are higher if we need them when we’re ~70.
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Old 12-07-2017, 04:03 PM   #40
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Huston, while I am familiar with the concepts you mention, my motivation in considering a SPIA is your item #1 - covering our essential expenses with guaranteed income. Purchasing this annuity would effectively accomplish that goal - which is the only reason I am tempted to go over to the dark side and cast my lot with the great unwashed.

I am very appreciative of all the input from you and everyone else who has commented. It is really tough for me to fork over a substantial chunk of change to an insurance company and I'm still thinking about it. While I dally, the market will probably tank and I'll be saying, "Oops, too late."
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