Prudential White Paper on Maximizing Soc Sec

[New Thinking]

Charles - You are exactly correct in your thinking. It is often more advantageous to start the lower SS spouse's benefit first and delay the higher benefit. This is because the lower benefit dies off no matter which spouse dies first.

Nords - You may be right. IMO, in the future, the concept of early retirement will most likely be retiring at 58 - 64 as most others will have to work longer because they do not have the resources to retire. It may be me, but I notice a lot of anxiety from some posters when markets are going down and, when inflation starts heating up. Some even worry about providing for their spouses when if they go first. I think creating a large inflation-adjusted income stream (for both spouses) with part of one's portfolio could give people the courage to retire early and the risk-tolerance to be more aggressive with the remaining part of portfolio.

[cute fuzzy bunny]

Originally Posted by New Thinking

IMO, in the future, the concept of early retirement will most likely be retiring at 58 - 64 as most others will have to work longer because they do not have the resources to retire.

I think thats probably the case right now for a very large majority of people. But as now, there will still be LBMY'ers, business owners, high income people interested in a change of lifestyle and people who "win the lottery" via a number of methods who will retire earlier than their "traditional retirement age" or a few years earlier. This is this web sites primary target audience.

It may be me, but I notice a lot of anxiety from some posters when markets are going down and, when inflation starts heating up.

I've always appreciated people who sell their products based on positive attributes rather than on fear. Of course people get anxious when things arent marching upwards.

Some even worry about providing for their spouses when if they go first.

Absolutely. I've planned for this by setting up an investment strategy that gives my wife the maximum provision in the event of my untimely death.

I think creating a large inflation-adjusted income stream (for both spouses) with part of one's portfolio could give people the courage to retire early and the risk-tolerance to be more aggressive with the remaining part of portfolio.

For the 99,033,273th time...its CPI adjusted, NOT inflation adjusted.

I would find getting an extra 1-2% return on my investments over a 30-40 year period to provide me a lot more courage than a guarantee of a lower return in exchange for an insurance company taking on the risk (and the risk premium).

But I can clearly see how for some people, older, very risk averse, absolutely nobody and no organization they'd like to leave money to and expecting a very long life span...an annuity makes sense.

The whole idea of buying an annuity to avoid taking SS early...again...for people still working, seeing other sources of income where an annuity payment provides better tax treatment than a social security payment or for people who think getting a few hundred extra a month in their 80's will work better for them than getting a thousand or so extra a month in their 60's...might make sense.

[Nords]

Originally Posted by New Thinking

I think creating a large inflation-adjusted income stream (for both spouses) with part of one's portfolio could give people the courage to retire early and the risk-tolerance to be more aggressive with the remaining part of portfolio.

I trust the inflation-adjusted income stream(s) being provided to me by the U.S. government. *I may not accept their math as equivalent to reality, but they get to make up the rules because they also get to raise taxes (or govt debt) to pay my income.

For anything else my sleep quality would depend on self-annuitizingstreaming in order to avoid having to worry about the survival of an insurance company. *Just like I'd take a lump sum pension/401(k) to avoid having to worry about the survival of an airline or a steel/auto company.

I also get the govt stream without any of the costs, hidden expenses, and high-pressure sales tactics of the insurance company. *Imagine if Social Security or Medicare was marketed to you by MetLife or Prudential or Hancock...

BTW a large part of an inflation-adjusted income stream could also be generated by:
- a few years' expenses in cash while an equity portfolio recovers,
- the short-term bond component of a portfolio (although mainly intended to reduce volatility), and
- I bonds/TIPS.

But that's just my opinion. *I understand that other investors prefer loaded mutual funds, financial advisors, and full-service brokerages too. *Caveat emptor.

[donheff]

Originally Posted by Cute Fuzzy Bunny

Don...if you're still reading, yes theres something missing. For starters, you did a 75% survivor benefit, which would obviously provide a lower payout to your survivor. Further, the ~4% payout is CPI adjusted, which tends to run in the 2.5-3.5% range over the long haul - - and we're definitely talking about a long haul here.

I'm baack. Thanks CFB. You just confirmed that I wasn't missing anything substantial. I have no intentions to buy an annuity, I have a very good Fed pension already. When my wife pulls the plug in a few years we will probably roll over her various accounts to an IRA and are struggling with whether we construct the portfolio ourselves with a variety of index funds or go with something like Wellesley, or a mix of both.

But I can understand risk averse people wihout the luxury of an inflation protected defined benefit plan wanting to play it safe. Just read what some of the posters here say: they have just enough to go with 4% withdrawal but are ready to drop in bad years, don't care if they leave anything to the kids, etc. In those circumstances I can see the attraction of covering living expenses with an annuity (knowing when you are gone, that money is gone) and covering travel and fun with the remainder of the portfolio. Then, in a worse case scenario you read books from the library and blogs on the Internet rather than return to work. Yeah, CPI isn't the be all and end all, but it is a reasonable basis for covering general expenses (I am not inviting a flame war here -- I have seen all the debate on this topic).

Elsewhere in this thread there were several mentions about what is good or bad for ERers. But ER is a broad range. A fair number of you ERed at what I would consider very early ages. But probably as many or more of us ER in our mid to late 50s (56 for me) and certainly view that as ER. Most people who retire at 62 when they become eligible for SS would think of themselves as ERing and would value the advice available on this board. The point is, we should remember that we are talking to a variety of people in vastly differing circumstances and should not expect our plans to be best for everyone.

[donheff]

Originally Posted by Nords

For anything else my sleep quality would depend on self-annuitizingstreaming in order to avoid having to worry about the survival of an insurance company. Just like I'd take a lump sum pension/401(k) to avoid having to worry about the survival of an airline or a steel/auto company.

Nords hits my biggest fear on the nail - who do you trust. If United Airlines Fs goes backrupt and Fs over their employees what happens to your annuity if the insurance company goes belly up.

What I have never really understood is how secure these funds we all use are. If Vanguard's annuity could evaporate what about their funds? Is it prudent to diversify you funds among fund providers on the off chance that something catastrophic might befall the fund company? Does this belong in a separate thread?

[haha]

Originally Posted by Nords

A couple of points:

First, while this is an interesting article, it's probably only of interest to those ERs who are approaching age 62 or contemplating large IRA balances (and thus large IRA RMDs).*

Well, that may be a lot of the people here. They don't all shout their ages. And some of the follks here, while younger themselves, may have parents or friends who could benefit from this way of thinking. I guess I don't understand what the downhside of new information might be? Is it a bit like the old days when books were "Banned in Boston" to protect the innocents from their dangerous content?

HA

[Nords]

Originally Posted by HaHa

I guess I don't understand what the downhside of new information might be? Is it a bit like the old days when books were "Banned in Boston" to protect the innocents from their dangerous content?

I don't object to new information, and I especially don't object to a vigorous discussion of it, but I also am skeptical of the source of that new info.

We don't call it "Banned in Boston" anymore-- we call it "moderated"...

[BigMoneyJim]

Originally Posted by Nords

but I also am skeptical of the source of that new info.

A company that sells annuities says annuities are useful? And ties in a recent political hotbutton? And fear? Why be skeptical about that?

If I were to redesign this conversation I wouldn't make it as combative, but I think it's a good discussion. My personal bias is that generally annuities are bad--or underperforming at best--for the investor, but they have their niche uses.

[haha]

Originally Posted by Nords

but I also am skeptical of the source of that new info.

A bedrock axiom of psychology is that you don't ever change anyone's mind by presenting novel arguments. You persuade by recasting your new information in old clothes, the old clothes that the person you are trying to persuade is already used to wearing.

In our capitalist economy, almost all or maybe even all information is from an interested party. What makes Bogle or Bernstein more reliable sources of information than the people who wrote the White Paper being discussed?

I am willing to trust myself and others to decide what information is reliable and relevant in our own cases..

But to do this people have to feel free to give the information. After all, no one is pitching us to buy annuities; they are just explaining them, and showing possibly novel applications of the annuity concept.

Seems safe enough to me.* But then, I am kind of a Libertarian.

Ha

[haha]

Originally Posted by BigMoneyJim

A company that sells annuities says annuities are useful? And ties in a recent political hotbutton? And fear? Why be skeptical about that?

It is just possible that NT is on to something with his mention of fear. Let's wait a few months. If the equity markets continue down we'll se how impervious to fear we all are.

Anyway, this whole retirement thing is about fear. Fear that we won't have enough, fear of cat food, etc. etc. Let's be realistic. Fear of lost sleep, fear of husbands’ or wives’ disapproval and disappointment if things go seriously wrong.

There is a social psych concept called “anchoring”. Basically it means that people set narrow limits around their expectations. Based on recent experience, statements of prominent people or on who knows what. Any discussion of possibilities outside these limits is ignored or attacked.

Then reality comes along and does a lot of limit resetting for folks.*

Ha

[Nords]

Originally Posted by HaHa

A bedrock axiom of psychology is that you don't ever change anyone's mind by presenting novel arguments. You persuade by recasting your new information in old clothes, the old clothes that the person you are trying to persuade is already used to wearing.

Ironic that you'd use the word "axiom", where truth is assumed without being proven (maybe because it can't be proven).

"When the facts change, I change my mind – what do you do, sir?" - JM Keynes

I've learned to pay attention to that dislocating confusion caused by the "Whoa..." of absorbing new info and adjusting your perception of reality. As for recasting info, I'm not sure how that works. I prefer the approach of critical thinking-- spit it out, let people look at it, and let them make up their own minds. If it's worthwhile then it doesn't need to be sold to be appreciated.

Originally Posted by HaHa

In our capitalist economy, almost all or maybe even all information is from an interested party. What makes Bogle or Bernstein more reliable sources of information than the people who wrote the White Paper being discussed?

Well, for starters I don't have to buy anything from them to learn what they're thinking or to see what they're doing. And if they persuade me to their way of thinking, they don't profit from my change of perspective.

Another thing that makes them considered to be more reliable is their track records. That's why I trust Bernstein & Bogle more than, for example, Robert Kiyosaki.

Originally Posted by HaHa

It is just possible that NT is on to something with his mention of fear. Let's wait a few months. If the equity markets continue down we'll se how impervious to fear we all are.
Anyway, this whole retirement thing is about fear. Fear that we won't have enough, fear of cat food, etc. etc. Let's be realistic. Fear of lost sleep, fear of husbands’ or wives’ disapproval and disappointment if things go seriously wrong.
There is a social psych concept called “anchoring”. Basically it means that people set narrow limits around their expectations. Based on recent experience, statements of prominent people or on who knows what. Any discussion of possibilities outside these limits is ignored or attacked.
Then reality comes along and does a lot of limit resetting for folks.

Absolutely, and thousands of posts go a long way towards working through that fear.

Or that fear can be used to attack other people in retaliation for them pointing out your fears.

When an argument is refuted on its merits, that refutation is well done. When an argument is refuted by attacking the merits of the poster who puts it up, it's an indication that there's nothing in the article that can be attacked...

[cute fuzzy bunny]

Hey Ha...if you actually look at anything I wrote, I commented on things missing from the equation and making sure people had all the data. Most of the fire and brimstone came from the pro-annuity folks, at least it did at first.

I'll share a comment I sent to one of the moderators.

I have absolutely no problem with someone who is a regular contributor to this board airing out something useful...ideas, products, whatever. I dont even mind if they're a salesman of the product, as long as they tell the whole story, all the ups and downs, and arent spamming.

When its someone who only pops up when the topic of conversation is something they sell, without telling the whole story, playing to fears, or simply spamming a product or service...I'm compelled to fill in the blanks and try to offset the fear.

The problem with the "safety" of such a product, in this instance, is that I think for a fair percentage of people...especially those living in high cost areas that can see higher local inflation rates, is the slow loss of buying power over time. Is it "safe" for aunt sally to have to sell her house and move to the boonies because she cant afford to live where she is now any longer, because her annuity payments CPI adjustment just hasnt kept up?

Just an up-and-up statement: We take the risks and the risk premium, and smooth out the peaks and valleys to pay you a reduced but consistent amount.

That has value.

By the way, I believe the default rate on quality insurance companies is pretty low. Even during the Depression a lot of the larger insurance companies kept paying. That turned out to be a good deal.

As far as concern over fund companies, in the case of vanguard, you're a coop part owner of the firm (sort of) and you own the underlying stocks, bonds and other investment vehicles of the mutual funds you own. Theoretically, if the company simply ceased to be, you'd be entitled to those assets. I wouldnt bet on it working smoothly or easily, or actually getting everything. I also would really, really doubt it'd ever come to that.

[bosco]

As a person with no dog in this fight whatsoever (I have a decent pension coming which I could begin at any point), and for whom an annuity purchase makes absolutely no sense, allow me a couple of comments.

I think that this board is an amazing source of information about many things. But there is definitely a well-honed sense of what is "politically correct" and anyone who does not toe that line gets beat up pretty badly.

For example, market timers, those who tout annuities to name a couple of examples. I think there is a place for both in these discussions.

All approaches carry risks and have benefits. Our financial and emotional needs are all different. It doesn't hurt any of us to see these various points of view. It is not necessary for the "gatekeepers" of the forum to chase off those who might spout "disinformation" that the rest of us might be too stupid to recognize (that was sarcasm, in case you missed it). Chasing off overt spamming is, however, appreciated.

CFB, you have made a lot of valid points. An annuity seems to, on average, pay less. That is the price you pay to saddle a company with a certain type of risk. The purchaser is left with other types of risk. Annuities make no sense, either financially or emotionally, for me but might for some.

Most of these numbers, however, have been bandied about on a pre-tax basis which is all that Firecalc is equipped to do. The one point however, that has not been adequately rebutted by the critics of the original poster is the notion of taking an annuity as a play to avoid paying as many taxes on social security benefits (which, if I recall from the original article, seems to be one of the main selling points of the annuity).

This is a tough one to debate since no when knows what the tax structure will be X years down the road.

Bottom line--I vote that everyone make an effort to ENCOURAGE differing points of view and stay as civil as possible in doing so. More than civil, even.

I've followed this debate fairly closely but to be honest, have not run any numbers of my own. Nor do I intend to. I waste spend enough time running my own scenarios that are actually relevant to my life. Even so, I often learn something by carefully following both sides of such a debate. It is a bit disconcerting, however, when I get the feeling that things are teetering on the edge of civility.... Although this one seems to have recovered.

just my $.02

[BigMoneyJim]

Originally Posted by bosco

Bottom line--I vote that everyone make an effort to ENCOURAGE differing points of view and stay as civil as possible in doing so. More than civil, even.

I agree; that's more or less the message I meant in my earlier post, although after rereading it I don't think I made my point well--if at all.

[donheff]

Originally Posted by bosco

Bottom line--I vote that everyone make an effort to ENCOURAGE differing points of view and stay as civil as possible in doing so. More than civil, even....

It is a bit disconcerting... when I get the feeling that things are teetering on the edge of civility.... Although this one seems to have recovered.

just my $.02

Well said Bosco. We don't need anymore Trombone Al's fleeing the board. But the strong opinions are useful as well, so lets not get too tame.

[youbet]

Having followed along with this for days..........

I appreciated the Prudential article. The discussion of possible reasons to postpone SS was very interesting. The tag at the end suggesting a Prudential annunity to cover the time gap while waiting for delayed SS to start was expected and, in my mind, quickly dismissed as only one alternative. Just an expected "yawner."

I looked forward to more discussin regarding possible advantage, pros and cons, of delaying SS. But it seems it wasn't to be. Emotions ruled (I expected all cap typing to begin) and the anti-annutity shouting match began.

Sure wish we could have discussed the pros and cons of delaying SS. The anti-annuity stuff was boring old hat.