The Milevsky Papers

[chinaco]

This guy produces some thought provoking whitepapers and articles. He has had an impact on my point of view.

Here is a site that he is affiliated with.

Welcome to the Individual Finance and Insurance Decisions Centre online...

Here is the link to some of his articles.

Welcome to the Individual Finance and Insurance Decisions Centre online...

There are several very good articles listed that are worth reading. You should poke around and take a look.

As many of you know, he is a proponent of guaranteed income vehicles like pensions and SPIAs of various forms.

I thought this paper was interesting. http://www.ifid.ca/pdf_newsletters/SEPT2009RESEARCH.pdf

Many people on this board will need to hold their nose when they read because he advocates the use of a VA with a GLIB as part of the income strategy.

Of course, in other writings, he also notes that not all VA/GLIBs (and/or insurance companies) are the same and that one needs to be careful and pick and choose only after they understand the issues and their needs.

Nevertheless, I thought his idea was well thought out and stated clearly.

Where I struggle with SPIAs (of any sort)is optimizing the decision. I see the benefit and I do not have a problem paying a Fair and Reasonable amount to mitigate risk. But I have trouble identifying my specific optimum decision points (e.g., age of purchase) and the right amount to purchase. Plus I am not a "Close My Eyes and Fire" kinda person... So I am looking closely.

 

[brewer12345]

Milevsky is the only academic researcher I know of who concenrates exclusively in this area and he does pretty good work, IMO. I don't alwayts think that his conclusions are applicable in the real world, but it is worth a read for everyone who retires.

If you think you may need/want to buy something more complicated than a SPIA, there are fee-only advisors out there who exclusively work on insurance prodct analyses to determine what product might be appropriate, tear apart the prospectus, and reverse engineer the economics of a specific product. Well worth the money if we are talking about a significant fraction of your assets. I wouldn't consider fooling with anything more complicated than a SPIA without hiring one of these folks.

 

[Nords]

... or people could borrow his library book "Are You a Stock or a Bond?"

 

[chinaco]

Milevsky is the only academic researcher I know of who concenrates exclusively in this area and he does pretty good work, IMO. I don't alwayts think that his conclusions are applicable in the real world, but it is worth a read for everyone who retires.

If you think you may need/want to buy something more complicated than a SPIA, there are fee-only advisors out there who exclusively work on insurance prodct analyses to determine what product might be appropriate, tear apart the prospectus, and reverse engineer the economics of a specific product. Well worth the money if we are talking about a significant fraction of your assets. I wouldn't consider fooling with anything more complicated than a SPIA without hiring one of these folks.

Thanks.

I agree. I have a healthy fear of things I do not understand. And I will admit... I do not fully understand the issues enough to plunk down a significant amount of money on it.

We are on a solid financial footing. But I still want to create a safety net... mainly for my DW if something happens to me.

My simplistic approach... buy only enough nominal (fixed) SPIA to create a base income (by augmenting my pension and SS) that will support our normal lifestyle (which is our current lifestyle). The cost will amount to about 15 - 18% of our portfolio (definitely less than 20%). I intend to wait to see how interest rates move and make the purchase using a ladder style.

I intend to purchase it sooner (early in FIRE) rather than later. It will help reduce my SWIP% in the early and later years.

Over the following 15 years I may consider buying another nominal SPIA (an inflation raise ... if interest rates look attractive) to inflation adjust our guaranteed base income.

Most of our assets will remain in the portfolio.

While there is a lot of talk about longevity risk... and I believe that concern needs to be part of anybody's plan... it seems that most people do not live into their 90's.

Actuarial Life Table

Our family history seems to be mid 70's to mid 80's... there are some outliers like my grandfather that lived till 94.

The guaranteed income does 4 things for us:

1. Provides some sort of longevity safety net... just in case DW and/or I live to be really old.
2. Provides an early predictable income source which reduces the SWIP% and therefore increases the probability of a longer portfolio life.
3. Provides some level of risk mitigation just in cases some unexpected/really bad event happened financially.... and we lost a significant portion of our nest egg. While it is an unlikely event, it does happen to people. And as people age, they are more vulnerable.
4. DW is not investment savvy. If something happened to me unexpectedly, she might reduce her lifestyle (out of fear) unnecessarily. So the guaranteed income would help with that. I am also working to position the portfolio to be simple to manage (if it wound up in passive mode for a while).

 

[Dawg52]

Instead of VA's for the “sequence of returns” portion of his plan, wouldn't an Income Replacement Fund that Fidelity and Vanguard offer be a decent alternative? Not the same thing, but I would have a tough time wrapping my arms around a VA. More than one way to skin a cat.

chinaco, thanks for the post.

 

[chinaco]

Instead of VA's for the “sequence of returns” portion of his plan, wouldn't an Income Replacement Fund that Fidelity and Vanguard offer be a decent alternative? Not the same thing, but I would have a tough time wrapping my arms around a VA. More than one way to skin a cat.

chinaco, thanks for the post.

In some of his papers, he seems to think that if the right VA enables one to have their cake and eat it too.

The right VA/GLWB enables one to take higher risk and still have a floor on the withdrawal amount.... something akin to a heavy stock investment with a guaranteed lifetime income hedge.

The trick (aside from understanding the products, its features and restrictions) is finding a great deal with a strong company.