Risk averse retirement investing

[Ready]

Quote:

Originally Posted by bmcgonig 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]

Quote:

Originally Posted by obgyn65 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/reti...akes.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/foru...ml#post1405522

[Hermit]

Quote:

Originally Posted by bmcgonig 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.

Quote:

Originally Posted by daylatedollarshort 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/reti...akes.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/foru...ml#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]

Quote:

Originally Posted by 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.

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]

Quote:

Originally Posted by Ready 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]

Quote:

Originally Posted by Refresher Does this 20-25 year period need to begin at any specific age?

Yes...the age you decide to retire.

[Alan]

Quote:

Originally Posted by obgyn65 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]

Quote:

Originally Posted by Alan 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.

[brewer12345]

Wow, I go away for a weekend and you guys find the most inane things to squabble about. Everyone has different preferences and risk tolerances, and since they are not the same as mine they are all wrong so live and let live. I will point out that the extreme conservatives are way outside the mainstream of the financial profession, academic research as a whole, and how institutional portfolios are managed. That said, it is their money so they can do whatever they want with it.

[daylatedollarshort]

I am sure my portfolio is outside the mainstream by institutional standards, but then again many institutional pension plan portfolios, both public and private, aren't getting returns as planned and are severely underfunded -

Pandemic of pension woes is plaguing the nation

"A CNBC.com analysis of more than 120 of the nation's largest state and local pension plans finds they face a wide range of burdens as their aging workforces near retirement. Thanks to a patchwork of accounting practices and rosy investment assumptions, it's not even clear just how big a financial hole many states and cities have dug for themselves"

Pandemic of pension woes is plaguing the nation

Underwater: Horribly Underfunded, The PBGC May Not Have Funds To Cover Failed Union Pensions | RedState

Fears Over Pension Funding - WSJ.com

[Turboslacker]

Quote:

Originally Posted by daylatedollarshort 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/reti...akes.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/foru...ml#post1405522

I don't see a problem. Someone posting to a public forum asking a bunch of strangers for investment advice is interesting unto itself. A question was asked and numerous responses were provided based on people's experience and beliefs which vary significantly.

[brewer12345]

We loves us some confirmation bias here.

[Turboslacker]

Quote:

Originally Posted by Gumby 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.

To offer a contrarian view, it's actually a bummer that you will have so much excess beyond your needs. The majority of Americans see this these days as taking too much from Society and not "giving back" enough.

Does this mean that you didn't "win the game" because you could have retirement earlier than you did?

Something more for us all to debate.

[ERD50]

Quote:

Originally Posted by bmcgonig 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

Thanks for that analysis. My viewpoint is, an annuity (and delaying SS) is buying 'longevity insurance'. Like any insurance, we really are not looking for a 'return', we hope to never cash it in, we are looking to protect something.

So I ignore IRR calcs, and I just want to see what an annuity could do for protecting me from running out of money during my lifetime. So I made some FIRECalc runs to compare no annuity to half your money in an annuity. For each case, I set "Investigate" to find spending level for 100% success:

A) $1M portfolio, 40 years, all other defaults. Result: $33,413.

B) $500K portfolio (the other half was spent on the annuity), 40 years. On "Other income/spending" add a $66,360 non-inflation adjusted income in year 2024 ( the annuity payout - $13,272 X 5). Result: $28,372.

So, if I simulated the deferred annuity numbers given above correctly (pay now, start collecting 10 years later for life?), then historically, an annuity at today's rates hurt you.

Some caveats - the failure most likely would have been the 1966 run. Maybe interest rates were higher that year, and an annuity purchased in that year may have had a higher payout? I'm not sure which interest rates are relevant. So more investigation, and it takes an annuity payout 1.5x the above to match the non-annuity portfolio spend level. Would payouts have been that much higher in 1966?

-ERD50

[Alan]

Quote:

Originally Posted by Turboslacker To offer a contrarian view, it's actually a bummer that you will have so much excess beyond your needs. The majority of Americans see this these days as taking too much from Society and not "giving back" enough. Does this mean that you didn't "win the game" because you could have retirement earlier than you did? Something more for us all to debate.

Needs and wants are quite different and I have been giving back by spending much more than I need, and doing my bit in boosting consumer spending and stimulating the economy. As a wage earner any extra money I got used to go into savings, now I spend it.

[34rlsa]

Isn't this a forum? ... a place, meeting, or medium where ideas and views on a particular issue can be exchanged.

I'm the OP of Fear and Greed parts 1 and 2... and I have no problem with anyone offering advice opinions or whatever to questions I or anyone else posts on this forum. I'm here for the camaraderie of a shared goal... nothing else.

If you're relying on this or any internet social media to exclusively direct your investment/retirement decisions you may be taking another type of "risk".

All of our circumstance are unique. But by sharing our varied scenarios here on this forum... are we not helping each other to apply or consider alternative and possibly better courses of actions to achieve our goals?

[ERD50]

Quote:

Originally Posted by 34rlsa Isn't this a forum? ... a place, meeting, or medium where ideas and views on a particular issue can be exchanged. ... All of our circumstance are unique. But by sharing our varied scenarios here on this forum... are we not helping each other to apply or consider alternative and possibly better courses of actions to achieve our goals?

Sharing ideas and viewpoints is great. The problem some of us have with some posts/posters, is they repeatedly supply information without context.

Context is important. Sure, you need to do your own due diligence on anything offered here, but information w/o context just adds to the noise, and makes this forum less useful.

Just my 2 cents.

-ERD50

[obgyn65]

Alan - I cannot give "the full picture" every time I answer a question about financial advice from a newbie. I have no time for this, it is not practical, and in my view it is not reasonable to expect posters to give a "full picture" about their financial profile and choices whenever they answer a question asking them for financial advice.

Did other posters, including under this thread, give the full picture about themselves ? They didn't. I just answered the OP's question truthfully from my viewpoint, which is what a public forum is about. Newbies and others can use the google function under this site to search for our previous answers or look at our user profiles and get more info about our financial circumstances to see where we come from.

On a side note, I do not have a "solid foundation of pensions covering the basic expenses". I have not worked many years in the US and my salary in Europe was a fraction of what I make here. Plus, I spent many, many years studying. This is why I will also have to rely on US social security and the UK state pension - if they are still around in 10 or 20 years' time.

Quote:

Originally Posted by Alan 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.