Risk averse retirement investing

[daylatedollarshort]

That was mentioned in my earlier post, but edited above to repeat it.

Sorry, you are right. I put in your full post in my post and corrected my comment on it.

 

[John Galt III]

If you have a 401K, and a Stable Value fund available in it, you can get anywhere from 1 to 3 percent return per year. And the 401K is very safe from creditors.

 

[pb4uski]

But wouldn't buying deferred annuities in your 40s (starting paying at age 62 for example) and buying SPIAs after age 75 (where mortality credits are highest) have a better outcome than a modest:fixed income AA?

This assumes we factor out heirs, married or single, etc.

I don't see how deferred annuities would be preferable. Annuity writers invest in the same fixed Income securities and then reduce it for expenses and profit/cost of capital in determining crediting rates vs fixed Income expense ratios.

Sent from my KFJWI using Tapatalk HD

 

[Midpack]

KFJWI = Kindle Fire HD 8.9 WiFi evidently, in case anyone else wonders...I didn't know.

Sent from my (old) iPad2 64GB using my index fingers

 

[traineeinvestor]

A portfolio that was mostly bonds, CDs and bank deposits would scare the $@### out of me.

With a potential time horizon of 50+ years, inflation in our cost of living worries me a lot more than market volatility. The bottom line for me is that there is no possible way to avoid all possible risks to a retirement portfolio - you can choose your risks (including diversifying to select exposure to different types of risk), but there is no such thing as a "no risk" portfolio.

 

[LOL!]

I'd like to see how to save $100 a year on laundry detergent.

I just looked at Amazon and name-brand Tide is less than 25 cents a load. So one hundred dollars of laundry detergent will let one do 400 loads of laundry a year. If one did 4 loads a week, that would be $50 of laundry detergent a year. If one used half the detergent amount, that would be $25 of laundry detergent a year. If one used an off-brand, I am sure one could save even more.

Anyways, I hope folks can see that saving $100 a year on laundry detergent was probably the wrong metaphor to use on a forum based on dryer sheets.

 

[Earl E Retyre]

I'd like to see how to save $100 a year on laundry detergent.

I just looked at Amazon and name-brand Tide is less than 25 cents a load. So one hundred dollars of laundry detergent will let one do 400 loads of laundry a year. If one did 4 loads a week, that would be $50 of laundry detergent a year. If one used half the detergent amount, that would be $25 of laundry detergent a year. If one used an off-brand, I am sure one could save even more.

Anyways, I hope folks can see that saving $100 a year on laundry detergent was probably the wrong metaphor to use on a forum based on dryer sheets.

LOL, you really lived up to your name. That post made me laugh out loud. Hilarious! I happen to agree with the daylatedollarshort's points. But agree that laundry detergent savings (LDS) was probably not the way to go.

 

[obgyn65]

Well with all due respect - is there something you know about the OP that I don't? Unless I am missing something from previous posts, maybe the OP has $3m or $4m, and lives on $40k or 50k a year, in which case he does NOT have to take any risk at all. He wants to take no risk and maybe has no heir. If he does not want to leave any legacy to anyone, I really don't see why a caveat is needed to my post. If a caveat is needed to my post, then a lot more caveats are needed

Your graphs in post 10 do not answer my question. I would like to see concrete, verifiable evidence that those using deferred annuities their 40s and SPIAs in their 70s or later lose out compared to those investing in equities. I will try to find a couple of papers from W. Pfau on this topic. He seems to favor the use of SPIAs and even the superiority of deferred annuities over SPIAs.

Please read this : http://www.advisorperspectives.com/newsletters13/pdfs/Why_Retirees_Should_Choose_DIAs_over_SPIAs.pdf

You need only compare your approach to the chart in post #10 above to know. However don't overlook the fact that annuity payouts include return of principal, they are not "returns."

I am not criticizing a (very) conservative approach like yours, but it's (equities) not an either or decision - which you usually forget to note. The less risk you take, the larger your portfolio has to be relative to spending, substantially larger without equities - 40-60% is not trivial. Not including the caveat could mislead a novice member...

 

[obgyn65]

What are crediting rates?

I don't see how deferred annuities would be preferable. Annuity writers invest in the same fixed Income securities and then reduce it for expenses and profit/cost of capital in determining crediting rates vs fixed Income expense ratios.

Sent from my KFJWI using Tapatalk HD

 

[Alan]

Well with all due respect - is there something you know about the OP that I don't? Unless I am missing something from previous posts, maybe the OP has $3m or $4m, and lives on $40k or 50k a year, in which case he does NOT have to take any risk at all. He wants to take no risk and maybe has no heir. If he does not want to leave any legacy to anyone, I really don't see why a caveat is needed to my post. If a caveat is needed to my post, then a lot more caveats are needed

I think you should also be adding the caveat that your financial planning is underpinned with pensions because in the past you have asked on threads about any ways to avoid your SS being reduced because of WEP.

I am in a similar situation with a combination of pensions, 3 of them COLA'ed, so that if my retirement investments get burned either by poor market returns or by inflation I have a secure income that I can live on. I include SS and the UK equivalent of SS when I say pensions.

 

[daylatedollarshort]

I'd like to see how to save $100 a year on laundry detergent.

I just looked at Amazon and name-brand Tide is less than 25 cents a load. So one hundred dollars of laundry detergent will let one do 400 loads of laundry a year. If one did 4 loads a week, that would be $50 of laundry detergent a year. If one used half the detergent amount, that would be $25 of laundry detergent a year. If one used an off-brand, I am sure one could save even more.

Anyways, I hope folks can see that saving $100 a year on laundry detergent was probably the wrong metaphor to use on a forum based on dryer sheets.

I wasn't buying low priced commercial detergent on Amazon. I used to buy hypoallergenic, no caustic chemical detergent at the local grocery store in a high rent zip code in a high cost of living area. Plus I probably do a load a day of laundry.

I am not sure what your point is, that I don't know what I spend on laundry detergent, or that hundreds of little recurring expenses added up over 50 years do not result in big savings?

My point is that we had hundreds of little items like that we were overspending money on. If you already have every expense in your budget optimized, including buying low cost brands of every product from low cost stores, then logically you would not have any additional expense cuts to make.

 

[ERD50]

I don't see how deferred annuities would be preferable. Annuity writers invest in the same fixed Income securities and then reduce it for expenses and profit/cost of capital in determining crediting rates vs fixed Income expense ratios. ...

Bu the annuity writers do have the advantage of risk pooling. I do not know if the costs outweighs the advantage for the annuity buyer though.

I've never tried putting these into FIRECalc, I guess there are on-line quotes for annuities, shouldn't be too hard to get some general ideas (not today for me, will be busy with other things). I suspect that the non-cola affect is likely to be a downer.

-ERD50

 

[bmcgonig]

Bu the annuity writers do have the advantage of risk pooling. I do not know if the costs outweighs the advantage for the annuity buyer though.



I've never tried putting these into FIRECalc, I guess there are on-line quotes for annuities, shouldn't be too hard to get some general ideas (not today for me, will be busy with other things). I suspect that the non-cola affect is likely to be a downer.



-ERD50

Since we are experiencing the Pineapple Express here in the Bay Area I had time to play with this.

I got a quote from fidelity for a deferred annuity for a single man aged 60 deferring until age 70. And then determined the IRR, I hope correctly.

Investing 100000 at age 60 one would receive 13272 per year from age 70. The IRR of course depends on when you die. But if you are a conservative investor concerned with longevity, the results are quite good:

If you live to 100 the IRR is 6.468%
At 95 it's 6.117
At 90 it's 5.536
At 83 which is the life expectancy for a 60 yr old, it's 3.9
And of course goes down from there to a neg number if u die soon.

So if you are worried about longevity the deferred annuity allows you to swap a large positive IRR if you live a long time for a large negative one, if you die early.

If you have good genes and your parents lived to a ripe old age , and you're healthy, then, for me anyway, there's a good case to be made that this is way better than a conservative income portfolio...unless I screwed up the calculation

I'd welcome opposing opinions or someone seeing holes in this as I have severe longevity in my family

 

[Midpack]

Well with all due respect - is there something you know about the OP that I don't? Unless I am missing something from previous posts, maybe the OP has $3m or $4m, and lives on $40k or 50k a year, in which case he does NOT have to take any risk at all. He wants to take no risk and maybe has no heir. If he does not want to leave any legacy to anyone, I really don't see why a caveat is needed to my post. If a caveat is needed to my post, then a lot more caveats are needed

I am not criticizing a (very) conservative approach like yours, but it's (equities) not an either or decision - which you usually forget to note. The less risk you take, the larger your portfolio has to be relative to spending, substantially larger without equities - 40-60% is not trivial. Not including the caveat could mislead a novice member...

I don't need to know more about the OP to make the statement in blue, which is much the same as your statement in blue.

The graphs do provide a good indication of how risk and return relate.

Re: the caveat: Just my opinion, but if you're going to recommend investing in CDs, annuities and fixed income without any equity allocation (esp to newbies), you should also note that very conservative approach will require a much larger portfolio relative to spending. There are many inexperienced readers who may not realize how substantial that difference is.

Beyond that we've had this discussion many times, no need to repeat ourselves.

 

[Chuckanut]

I don't see how deferred annuities would be preferable. Annuity writers invest in the same fixed Income securities and then reduce it for expenses and profit/cost of capital in determining crediting rates vs fixed Income expense ratios.

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Is it the idea that if one outlives fellow annuity holder, one can also collect part of their income? Not that I recommend an annuity, but the idea is that those who die early allow bigger payments for the remaining folks. But are the payments big enough?

 

[Ready]

If you live to 100 the IRR is 6.468%
At 95 it's 6.117
At 90 it's 5.536
At 83 which is the life expectancy for a 60 yr old, it's 3.9
And of course goes down from there to a neg number if u die soon.

Those numbers look about right based on my research into annuities. Yes, there is a lot of guessing on how long you will live. Since insurance companies sell lots of policies, I'm sure the law of averages works out for them. But if you do live to be 100, a return of over 6% looks pretty good.

The problem I have with annuities is that while interest rates and bond yields are at historic low levels right now, who knows what the world will look like in 10,20,30+ years? Remember the period of double digit inflation in the 70's? 6% wouldn't have looked good at all then. The rates you can get today on an annuity are primarily based on today's yields in the marketplace. And we know we are at historic lows, so it seems like a bad bet to me to buy an annuity today that will not return money to me for over a decade. I'd rather roll the dice and hope that interest rates rise in the next decade, and annuity returns rise along with them. They can't go much lower, so what do you have to lose by waiting?

 

[daylatedollarshort]

I really don't see why a caveat is needed to my post. If a caveat is needed to my post, then a lot more caveats are needed

I guess I am with you. I cringe when I see first time, newly retired posters asking for conservative portfolio advice and they are told to put over half their money in stocks, with no mention of sequence of returns risk or pros and cons of that approach.

Bill Bernstein said in a recent article, "When you've won the game, why keep playing it? .......How risky stocks are to a given investor depends upon which part of the life cycle he or she is in. For a younger investor, stocks aren't as risky as they seem. For the middle-aged, they're pretty risky. And for a retired person, they can be nuclear-level toxic. "

http://money.cnn.com/2012/09/04/retirement/investing-mistakes.moneymag/

If doesn't sound to me like Bill Bernstein is as convinced that a high stock portfolio will necessarily provide higher spending power than a much more conservative portfolio.

I liked Ha's advice on giving advice from another thread -

"I think it is a mistake to tell people what to do with their money. People must "own" their plans about important things like this, or they will not believe in them and they might easily abandon the plans under heavy stress, which will certainly come from time to time. There is validity to many of these ideas, but they are not one size fits all.

I would not like to convince someone that s/he needs more stocks, right before stocks drop 40%. If we are honest and aware, we will realize that the future is unknowable, and be properly modest about what we say-particularly in the area of advice.

Ha"

http://www.early-retirement.org/forums/f28/fear-greed-and-aa-part-2-a-70212.html#post1405522

 

[Hermit]

Since we are experiencing the Pineapple Express here in the Bay Area I had time to play with this.

I got a quote from fidelity for a deferred annuity for a single man aged 60 deferring until age 70. And then determined the IRR, I hope correctly.

Investing 100000 at age 60 one would receive 13272 per year from age 70. The IRR of course depends on when you die. But if you are a conservative investor concerned with longevity, the results are quite good:

If you live to 100 the IRR is 6.468%
At 95 it's 6.117
At 90 it's 5.536
At 83 which is the life expectancy for a 60 yr old, it's 3.9
And of course goes down from there to a neg number if u die soon.

So if you are worried about longevity the deferred annuity allows you to swap a large positive IRR if you live a long time for a large negative one, if you die early.

If you have good genes and your parents lived to a ripe old age , and you're healthy, then, for me anyway, there's a good case to be made that this is way better than a conservative income portfolio...unless I screwed up the calculation

I'd welcome opposing opinions or someone seeing holes in this as I have severe longevity in my family

If you divide 13272 into 200K you get a little over 15 years to double your money, but they had your money for 10 years before you got anything. The rule of 72 says 72/25 = 2.88% which is what you are earning on your money by the time you double it at the ripe old age of 85. Why not just put it in a PenFed CD and if you die earlier than 85 you come out ahead and if you die after 85 you most likely will still come out ahead?

I'm not the best at financial math so check my numbers, but I'm not sure I see a great upside to annuities.

 

[obgyn65]

This. A thousand times this. Midpack, Alan, ERD and others - bookmark this please.

I guess I am with you. I cringe when I see first time, newly retired posters asking for conservative portfolio advice and they are told to put over half their money in stocks, with no mention of sequence of returns risk or pros and cons of that approach.

Bill Bernstein said in a recent article, "When you've won the game, why keep playing it? .......How risky stocks are to a given investor depends upon which part of the life cycle he or she is in. For a younger investor, stocks aren't as risky as they seem. For the middle-aged, they're pretty risky. And for a retired person, they can be nuclear-level toxic. "

http://money.cnn.com/2012/09/04/retirement/investing-mistakes.moneymag/

If doesn't sound to me like Bill Bernstein is as convinced that a high stock portfolio will necessarily provide higher spending power than a much more conservative portfolio.

I liked Ha's advice on giving advice from another thread -

"I think it is a mistake to tell people what to do with their money. People must "own" their plans about important things like this, or they will not believe in them and they might easily abandon the plans under heavy stress, which will certainly come from time to time. There is validity to many of these ideas, but they are not one size fits all.

I would not like to convince someone that s/he needs more stocks, right before stocks drop 40%. If we are honest and aware, we will realize that the future is unknowable, and be properly modest about what we say-particularly in the area of advice.

Ha"

http://www.early-retirement.org/forums/f28/fear-greed-and-aa-part-2-a-70212.html#post1405522

 

[gcgang]

Interesting Bernstein article.

Am I understanding him correctly on the 20-25 times expense "reserve fund - for example, if my necessary spending after pension and SS is $50k/year, I should have $1mm-$1.25mm basically in cash equivalents?

Then you can put any additional funds 100% in equities to try and meet your aspirational goals? I would think real estate, vacation, investment or other, could also be in this space.

 

[Ready]

Interesting Bernstein article.

Am I understanding him correctly on the 20-25 times expense "reserve fund - for example, if my necessary spending after pension and SS is $50k/year, I should have $1mm-$1.25mm basically in cash equivalents?

Then you can put any additional funds 100% in equities to try and meet your aspirational goals? I would think real estate, vacation, investment or other, could also be in this space.

Yes, that is his theory. If the fixed income portion of your portfolio can cover you for 25 years, you can be as aggressive as you want with the equities portion. That always gives me some peace of mind when thinking about the very long time horizon one has to plan for when they retire at an early age.

 

[Refresher]

Yes, that is his theory. If the fixed income portion of your portfolio can cover you for 25 years, you can be as aggressive as you want with the equities portion. That always gives me some peace of mind when thinking about the very long time horizon one has to plan for when they retire at an early age.

Does this 20-25 year period need to begin at any specific age?

 

[Ready]

Does this 20-25 year period need to begin at any specific age?

Yes...the age you decide to retire.

 

[Alan]

This. A thousand times this. Midpack, Alan, ERD and others - bookmark this please.

I didn't give any financial advice, and the reason I didn't is because, like you, I have a solid foundation of pensions covering the basic expenses. The point of my post is that when YOU give financial info to a newbie of what your AA is, that you should give the full picture, otherwise they may make the wrong assumptions.

 

[Gumby]

I didn't give any financial advice, and the reason I didn't is because, like you, I have a solid foundation of pensions covering the basic expenses. The point of my post is that when YOU give financial info to a newbie of what your AA is, that you should give the full picture, otherwise they may make the wrong assumptions.

Very wise words, Alan. If all goes according to plan, when we retire in about 4 years, two cola'd pensions will just cover our expenses. Social security will kick in 2.5 years later and give us a nice 30% cushion above and beyond our needs. So what do we do with the money in our nest egg? It will be enough, at a 4% withdrawal rate, to cover 1.5 times our spending (if our pensions and SS should disappear). We could go ultra conservative, since we won't need any more money. We could also shoot for the moon. We don't have any children, so we don't need to leave an estate. And if we lost it all, it would not affect our lives. So what do we do? I suspect that we will do the same thing that got us here in the first place -- maintain a moderate asset allocation, probably 60/40.

But regardless of what we do, it would be irresponsible for me to give that same advice to someone who doesn't understand our situation, as it may be highly inappropriate for his or her own situation.