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Stocks and SPIAs - the best way to go?
Old 09-25-2012, 05:20 PM   #1
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Stocks and SPIAs - the best way to go?

Here is an interesting article on how to best achieve retirement income goals for many people. Interestingly, the author finds that a combination of stocks and SPIAs works much better than stocks and bonds. Food for thought.

Retirement Researcher Blog: An Efficient Frontier for Retirement Income
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Old 09-25-2012, 05:47 PM   #2
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Wade is the new generation of researchers who fly right in the face of the old school wisdom.

I like his thinking very much and i have to admit many times the details of his research are far beyond my comprehension.

But i find i do agree with him most of the time. I have lots of interest in combining annuities and equities for a conservative mix.

I have to read the complete article as this really interests me.

Thanks for the link
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Old 09-25-2012, 09:13 PM   #3
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Quite a dip in final value for a few percent improvement in success rate. Interesting that SPIA's are better than bonds though. Guess I'm still all equities.
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Old 09-25-2012, 09:29 PM   #4
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If you look at the chart at 70:30 stocks vs bonds or annuities. The annuity trounces the results with bonds. And even at 30:70 the results are quite positive for the SPIA.. Very interesting chart.
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Old 09-26-2012, 01:51 AM   #5
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not sure about the stupid part
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Old 09-26-2012, 08:42 AM   #6
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I find it interesting that inflation adjusted SPIAs did not do that well due to their higher cost offsetting the inflation adjustment benefits.
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Wade Pfau's Latest Article - Bonds May Not Serve "Useful" Role in Retirement
Old 09-26-2012, 10:41 AM   #7
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Wade Pfau's Latest Article - Bonds May Not Serve "Useful" Role in Retirement

I subscribe to Mike Piper's Oblivious Invester blog. His latest blog dealt with a recent artcle by Wade Pfau titled "An Efficient Frontier for Retirement Income". Piper wrote that one of the more interesting aspects of the article is the conclusion that bonds might not be the way to go for certain retiree's retirement portfolios.

I just downloaded the full article from this web-site (An Efficient Frontier for Retirement Income by Wade Pfau :: SSRN) and have not yet had an opportunity to read it. Here are a couple of excerpts from the Abstract that sound interesting/provocative:

"This article outlines a different way to think about building a retirement income strategy, which moves dramatically away from the concepts of safe withdrawal rates and failure rates. The focus is how to best meet two competing financial objectives for retirement: satisfying spending goals and preserving financial assets. The process described here focuses on allocating assets between a portfolio of stocks and bonds, inflation-adjusted and fixed single-premium immediate annuities (SPIAs), and immediate variable annuities with guaranteed living benefit riders (VA/GLWBs)."

"Results are presented for a 65-year old couple whose lifestyle needs require a 4% inflation-adjusted withdrawal rate from retirement date assets. Their efficient frontier generally consists of combinations of stocks and fixed SPIAs. Perhaps surprisingly, bonds, inflation-adjusted SPIAs, and VA/GLWBs do not serve a useful role in the couple’s optimal retirement income portfolio."

I know a couple of poster's have cited Pfau's previous articles on retirement issues and wanted to know if you had seen this one yet. If you have, any thoughts?
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Old 09-26-2012, 11:03 AM   #8
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Results are provided for a 65-year old couple. Their Social Security benefit is equal to 2% of their retirement date assets. Their lifestyle spending goal is 6% of retirement date assets, which requires them to use a 4% withdrawal rate above Social Security to meet their goal. Minimum needs are also 6%.
I'm not sure how realistic SS equal to 2% of retirement date assets and annual spending of 6% of retirement date assets is. The other odd thing is that minimum needs is equal to lifestyle spending goal. I think for most couples that the goal would exceed the minimum.

Still an interesting hypothesis but I'm not so convinced that I will dump my 40% in bonds and use the proceeds to by SPIAs.

I guess if one is entitled to a pension that you would consider it a SPIA.
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Old 09-26-2012, 11:21 AM   #9
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See http://www.early-retirement.org/foru...ml#post1234209 thread
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Oops - And I Even Did a Search for Pfau's Name...
Old 09-26-2012, 11:31 AM   #10
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Oops - And I Even Did a Search for Pfau's Name...

...prior to posting to see if anyone had already started a thread on this subject. For some reason, Chuckanut's thread started yesterday did not show up in my search.

pb4uski, thanks for the redirect link.

Moderators, if you want to delete this thread, feel free. MODERATOR'S NOTE -- The two threads have been merged
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Old 09-26-2012, 11:47 AM   #11
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Originally Posted by mathjak107 View Post
Wade is the new generation of researchers who fly right in the face of the old school wisdom.

I like his thinking very much and i have to admit many times the details of his research are far beyond my comprehension.

But i find i do agree with him most of the time. I have lots of interest in combining annuities and equities for a conservative mix.

I have to read the complete article as this really interests me.

Thanks for the link
It's interesting that annuities have been out of favor for so long that their use is now going against conventional wisdom. How long before defined benefit pension plans come back?

FYI in many countries outside the US the default retirement product is a SPIA
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Old 09-26-2012, 11:59 AM   #12
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Dr. Pfau has more comments and examples in an e-mail he sent out today. If this interest you, I recommend Dr. Pfau's website and e-mails rather than trying to piece things together based upon the comments of others (such as myself.)
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Old 09-26-2012, 11:59 AM   #13
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Still an interesting hypothesis but I'm not so convinced that I will dump my 40% in bonds and use the proceeds to by SPIAs.
The difference in performance success for various %ages of stocks and bonds vs stocks and SPIAs is only a couple of percent. Is locking up a large fraction of your capital in an SPIA and the loss of flexibility worth the guaranteed income and slightly better chances of success? Also does the "Real value of the Assets at Death" for the SPIA portfolio's include the value of the SPIA? which of course your heirs don't get.

Finally TIAA-CREF will love all of this........maybe that TIAA-Traditional I have and have always planned to annuitize was a good move all along. And, of course, this all depends of historical returns of stocks and bond indexes. If you emphasise certain bond families how would the results differ......I wonder how the 40/60 split of Wellesley would have performed in this analysis.
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Old 09-26-2012, 01:02 PM   #14
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I took the annual returns for Wellesley from 1970 until today and applied a 4% annual withdrawal........to say it was successful would be an understatement.
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Old 09-26-2012, 01:16 PM   #15
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Originally Posted by pb4uski View Post
I guess if one is entitled to a pension that you would consider it a SPIA.
I would agree, since I/we purchased an SPIA because I did not have a pension (e.g. defined benefit plan), in addition to reducing portfolio exposure somewhat (to both equity/bonds) since that was where the preimum was obtained.

BTW, I/we still have a 50/50 AA target of equity/bonds & cash. The SPIA is looked at as any other income stream (e.g. SS) and we don't look at those streams as "bond equilivents". If we did, our equity holdings would be much higher than our risk acceptance would allow.
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Old 09-26-2012, 01:43 PM   #16
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....If we did, our equity holdings would be much higher than our risk acceptance would allow.
You mean lower, right?
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Old 09-26-2012, 02:03 PM   #17
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You mean lower, right?
I'm sure he means higher.
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Old 09-26-2012, 03:24 PM   #18
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I took the annual returns for Wellesley from 1970 until today and applied a 4% annual withdrawal........to say it was successful would be an understatement.
And what can we extrapolate from that regarding the next 42 years? Hindsight is a wonderful thing...
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Old 09-26-2012, 05:06 PM   #19
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I'm sure he means higher.
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Yes, I do.

If I want to maintain a 50/50 AA target, and I "add" an SPIA to the bond side (considering it as a bond), I need to increase equity holdings to maintain the same 50/50 mix.

That's what I see as a problem for those that look at any non-portfolio income stream (be it an SPIA, pension, SS, or any like device) as a bond.

It tends to drive up your equity holdings assuming you have an AA that has more than a few percentage points on the equity side.

I don't mingle portfolio holdings with defined income streams. Two different things, and managed in a different manner.

Right or wrong, just the way we look at it...
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Old 09-26-2012, 05:18 PM   #20
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Someone on another forum posed a good question.

How would taxes and muni's have affected the results on the bond side on the total outcome?

Taxes on overall totals may be very very different on total income skewing the results
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