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Stocks and SPIAs - the best way to go?
09-25-2012, 05:20 PM
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#1
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Aug 2011
Location: West of the Mississippi
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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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Comparison is the thief of joy
The worst decisions are usually made in times of anger and impatience.
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09-25-2012, 05:47 PM
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#2
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2005
Posts: 6,115
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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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09-25-2012, 09:13 PM
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#3
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Thinks s/he gets paid by the post
Join Date: Jul 2005
Posts: 4,366
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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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09-25-2012, 09:29 PM
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#4
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Thinks s/he gets paid by the post
Join Date: Sep 2006
Posts: 2,842
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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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But then what do I really know?
https://www.early-retirement.org/forums/f44/why-i-believe-we-are-about-to-embark-on-a-historic-bull-market-run-101268.html
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09-26-2012, 01:51 AM
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#5
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Thinks s/he gets paid by the post
Join Date: Nov 2005
Location: North of Montana
Posts: 2,769
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not sure about the stupid part
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There are two kinds of people in the world: those who can extrapolate conclusions from insufficient data and ..
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09-26-2012, 08:42 AM
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#6
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Aug 2011
Location: West of the Mississippi
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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.
__________________
Comparison is the thief of joy
The worst decisions are usually made in times of anger and impatience.
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Wade Pfau's Latest Article - Bonds May Not Serve "Useful" Role in Retirement
09-26-2012, 10:41 AM
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#7
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Recycles dryer sheets
Join Date: Mar 2005
Posts: 161
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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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Well, Helen; shall we just go home?
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09-26-2012, 11:03 AM
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#8
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Quote:
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%.
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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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09-26-2012, 11:21 AM
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#9
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,264
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Oops - And I Even Did a Search for Pfau's Name...
09-26-2012, 11:31 AM
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#10
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Recycles dryer sheets
Join Date: Mar 2005
Posts: 161
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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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Well, Helen; shall we just go home?
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09-26-2012, 11:47 AM
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#11
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Thinks s/he gets paid by the post
Join Date: Feb 2006
Posts: 4,872
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Quote:
Originally Posted by mathjak107
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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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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“So we beat on, boats against the current, borne back ceaselessly into the past.”
Current AA: 75% Equity Funds / 15% Bonds / 5% Stable Value /2% Cash / 3% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
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09-26-2012, 11:59 AM
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#12
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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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.)
__________________
Comparison is the thief of joy
The worst decisions are usually made in times of anger and impatience.
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09-26-2012, 11:59 AM
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#13
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Thinks s/he gets paid by the post
Join Date: Feb 2006
Posts: 4,872
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Quote:
Originally Posted by pb4uski
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.
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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.
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”
Current AA: 75% Equity Funds / 15% Bonds / 5% Stable Value /2% Cash / 3% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
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09-26-2012, 01:02 PM
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#14
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Thinks s/he gets paid by the post
Join Date: Feb 2006
Posts: 4,872
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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.
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”
Current AA: 75% Equity Funds / 15% Bonds / 5% Stable Value /2% Cash / 3% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
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09-26-2012, 01:16 PM
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#15
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gone traveling
Join Date: Apr 2009
Location: Eastern PA
Posts: 3,851
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Quote:
Originally Posted by pb4uski
I guess if one is entitled to a pension that you would consider it a SPIA.
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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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09-26-2012, 01:43 PM
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#16
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Quote:
Originally Posted by rescueme
....If we did, our equity holdings would be much higher than our risk acceptance would allow.
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You mean lower, right?
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09-26-2012, 02:03 PM
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#17
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Recycles dryer sheets
Join Date: Jun 2010
Location: Southwest Florida
Posts: 470
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Quote:
Originally Posted by pb4uski
You mean lower, right?
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I'm sure he means higher.
Bruce
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09-26-2012, 03:24 PM
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#18
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Quote:
Originally Posted by nun
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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And what can we extrapolate from that regarding the next 42 years? Hindsight is a wonderful thing...
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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: 50% equity funds / 45% bonds / 5% cash
Target WR: Approx 1.5% Approx 20% SI (secure income, SS only)
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09-26-2012, 05:06 PM
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#19
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gone traveling
Join Date: Apr 2009
Location: Eastern PA
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Quote:
Originally Posted by MBMiner
I'm sure he means higher.
Bruce
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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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09-26-2012, 05:18 PM
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#20
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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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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