PSA: Investing for Retirement: SPIAs, TIPS, Stocks
While I don't agree entirely (mostly in terms of timing more than principles), it's a timely article with some thought provoking ideas - and I am all for that!
If the quote is of interest to you, the article might be as well. [Disclosure: I found this link from Wade Pfau's blog].
Investing for Retirement: SPIAs, TIPS, Stocks and the 4% Rule
Originally Posted by Joe Tomlinson's article
Relying only on stocks and bonds to fund a decumulation strategy may no longer be feasible, given today’s low interest rate environment and the prospect of muted returns from the equities market. Investors should instead consider using single-premium immediate annuities (SPIAs) to fund at least a portion of retirement needs.
or the whole 4-page article in PDF format if you prefer http://advisorperspectives.com/newsl...Retirement.pdf
And some interesting opinions on the article from Wade Pfau.
Originally Posted by Wade Pfau's Blog
In my view, he has several important findings about the allocation between stocks, TIPS, and SPIAs:
-While partial annuitization has little impact on failure rates, it does help to dramatically reduce the magnitude of failure. Expected bequests are also reduced. The proper choice depends on how a retiree weighs the tradeoff between their ability to leave a bequest and their fear of running out of money.
-A TIPS ladder is quite exposed to longevity risk.
-SPIAs act as "turbo-charged" bonds. This suggests that there is not much room for bonds in a retirement portfolio. Instead of stocks and bonds, you may wish to instead be thinking more in terms of stocks and SPIAs.
-This final point is something I am still thinking through and don't have any clear opinion of my own yet. Conventional wisdom is that it is a bad time to annuitize when interest rates are low. Rather, wait for rates to rise. But I believe that Joe is essentially arguing that the overall case for partial annuitization (relative to the alternatives) becomes stronger precisely when interest rates are low.
No one agrees with other people's opinions; they merely agree with their own opinions -- expressed by somebody else. Sydney Tremayne
Retired Jun 2011 at age 57
Target AA: 60% equity funds / 35% bond funds / 5% cash
Target WR: Approx 2.5% Approx 20% SI (secure income, SS only)