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Re: Those Who Don't Have Pensions.............
Old 08-06-2006, 04:54 PM   #41
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Re: Those Who Don't Have Pensions.............

Oops I meant 65 not 62. The inheritance is pretty secure but w/o it his retirement income would be 32k/year. Point was, without the house in California, he would be screwed and looking at poverty in retirement. 30 years ago he moved to California and bought a house in an area that's now upscale, and that act will keep him out of relative poverty for the rest of his life.
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Re: Those Who Don't Have Pensions.............
Old 08-08-2006, 12:17 PM   #42
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Re: Those Who Don't Have Pensions.............

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Oops I meant 65 not 62.* The inheritance is pretty secure but w/o it his retirement income would be 32k/year.* Point was, without the house in California, he would be screwed and looking at poverty in retirement.* 30 years ago he moved to California and bought a house in an area that's now upscale, and that act will keep him out of relative poverty for the rest of his life.
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Re: Those Who Don't Have Pensions.............
Old 08-08-2006, 12:52 PM   #43
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Re: Those Who Don't Have Pensions.............

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Originally Posted by Nords
But for those who absolutely positively don't want to outlive their money, their only "guaranteed" solution is an annuity with a COLA-- for which peace of mind they will pay dearly. It'll almost certainly require more than 33x expenses...
IMHO, very dangerous advise to the uninformed (I know this does not include you). Your annunity is owned by an insurance company that is going to invest it in a diversified stock portfolio, skim some off the top every year (after skimming 5% up front), and return the rest to you. Given a similiar investment strategy (which you should have), the risk that they will go bust is actually higher than the risk that you will go bust. Look at is this way, to match the same return as the COLA annuity, your may only have to use a 2.5% to 3% SWR. What are the chances of this failing? Probably less than the chances of Big Insurance Inc. failing.

I think the annuity is much riskier than investing the money for yourself (assuming you are rational and competent). Am I wrong?
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Re: Those Who Don't Have Pensions.............
Old 08-08-2006, 01:00 PM   #44
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Re: Those Who Don't Have Pensions.............

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IMHO, very dangerous advise to the uninformed (I know this does not include you). Your annunity is owned by an insurance company that is going to invest it in a diversified stock portfolio, skim some off the top every year (after skimming 5% up front), and return the rest to you. Given a similiar investment strategy (which you should have), the risk that they will go bust is actually higher than the risk that you will go bust. Look at is this way, to match the same return as the COLA annuity, your may only have to use a 2.5% to 3% SWR. What are the chances of this failing? Probably less than the chances of Big Insurance Inc. failing.

I think the annuity is much riskier than investing the money for yourself (assuming you are rational and competent). Am I wrong?
Ummm, no, that isn't how annuities are managed by insurers. You give the money to an insurer who agrees to give you a stream of payments. The insurer invests the money mostly in gigh grade bonds and backs the money with some of its own capital. You get your promised stream of payments and the insurer gets whatever is left. If the insurer goes bust, you are backed by the state guaranty fund, which is a weak sister to the FDIC and not nearly as good. Assuming you can buy an annuity with a full COLA adjustment, your bggest risk is credit exposure to the insurer. This can be mitigated by spreading the money around and picking top shelf insurers to do business with. No way TIAA-CREF or Northwestern Mutual is ever going down the tubes, for example.
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Re: Those Who Don't Have Pensions.............
Old 08-08-2006, 07:13 PM   #45
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Re: Those Who Don't Have Pensions.............


Not sure why y'all are so down on annuities. Yes, many suck, but go to Vanguard and get an instant online quote. I did a dual survivor, 44 and 41 year old, inflation-adjusted annuity. $100K gets you $313 a month or ~3.7% real return. Pretty dang close to the 4% SWR, a lot better return than TIPS, and a lot safer, since Vanguard bears the risk/reward of you living too long/short. Seems like many would want to consider it for at least a portion of their RE, as "honey I shrunk the portfolio" insurance.

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Re: Those Who Don't Have Pensions.............
Old 08-08-2006, 07:59 PM   #46
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Re: Those Who Don't Have Pensions.............

Quote:
Originally Posted by Will Work 4 Beer
Not sure why y'all are so down on annuities. Yes, many suck, but go to Vanguard and get an instant online quote. I did a dual survivor, 44 and 41 year old, inflation-adjusted annuity. $100K gets you $313 a month or ~3.7% real return. Pretty dang close to the 4% SWR, a lot better return than TIPS, and a lot safer, since Vanguard bears the risk/reward of you living too long/short. Seems like many would want to consider it for at least a portion of their RE, as "honey I shrunk the portfolio" insurance.
Do you really mean "real return" (i.e. after inflation?). My calculator says it is spinning off 3.76% per year (like a decent MMF, lower than a CD today). Not real appealing to me, if I understand your post.

I've posted before some arguments for an IMMEDIATE annuity as longevity insurance, etc. as you get older (this is where CFB usually jumped in) but the allure of variables escapes me except in those particular situations posted above.
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Re: Those Who Don't Have Pensions.............
Old 08-08-2006, 08:25 PM   #47
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Re: Those Who Don't Have Pensions.............

Been a very long time - but in the 70's - I worked with a number of Brit/Commonwealth engrs. concerned with the French problem - aka home currency - talking up Swiss annuities as a way to blunt the issue.

I have yet to see annuities touted recently as a way of hedging against devaluation - does the home country inflation indexing eliminate the problem? If I have an annuity in a 'strong??' currency - will that help me as an ex-pat living on a squishy currency?

heh heh heh heh
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Re: Those Who Don't Have Pensions.............
Old 08-08-2006, 09:16 PM   #48
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Re: Those Who Don't Have Pensions.............

Quote:
Originally Posted by Will Work 4 Beer
Not sure why y'all are so down on annuities. Yes, many suck, but go to Vanguard and get an instant online quote. I did a dual survivor, 44 and 41 year old, inflation-adjusted annuity. $100K gets you $313 a month or ~3.7% real return. Pretty dang close to the 4% SWR, a lot better return than TIPS, and a lot safer, since Vanguard bears the risk/reward of you living too long/short. Seems like many would want to consider it for at least a portion of their RE, as "honey I shrunk the portfolio" insurance.

WW4B
How do they measure inflation? If they use CPI, which I believe is considered understated, over time this could erode the return.
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Re: Those Who Don't Have Pensions.............
Old 08-09-2006, 06:40 AM   #49
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Re: Those Who Don't Have Pensions.............

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Originally Posted by unclemick2
Been a very long time - but in the 70's - I worked with a number of Brit/Commonwealth engrs. concerned with the French problem - aka home currency - talking up Swiss annuities as a way to blunt the issue.

I have yet to see annuities touted recently as a way of hedging against devaluation - does the home country inflation indexing eliminate the problem? If I have an annuity in a 'strong??' currency - will that help me as an ex-pat living on a squishy currency?

heh heh heh heh
Those guys liked CHF-denominated annuities because the Swiss still back their currency with gold, unlike the vast majority of countries. So their currency is regarded as a "hard" currency not overly prone to inflation.

If you are inflation indexing in the home country, I think you are pretty much solving the inflation issue assuming that the index used to measure inflation is reasonably accurate. I personally think that CPI is mostly accurate, at least over long periods of time, so I am comfy with the idea.
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Re: Those Who Don't Have Pensions.............
Old 08-09-2006, 11:38 AM   #50
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Re: Those Who Don't Have Pensions.............


Yes, $313/month would be the real return, since next year (or whenever the inflation adjustment is done) it will be 1.X * $313 a month. Contrast this to the 2.4% or so real return on current TIPS, and the TIPS annuity doesn't seem a bad deal to me at all. If you spend your 5% MMF return, you're not adjusting the principal for inflation.

Or to put it another way, 4% SWR means I would take out $333/month from a $100K starting balance, and next year take out 1.X * $333 a month. But I'm bearing all the risk of portfolio meltdown, etc. and withdrawing from a portfolio that could be aroud 65% stocks. Why not trade some principal at death to take 3.7% real return on a portion of your portfolio and mitigate some of that risk?

Re: CPI being higher/lower than your real CPI. That could be, but firecalc, stock historical returns, etc. are also premised on being compared to CPI. So still seems pretty apples-to-apples to me.

M
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Re: Those Who Don't Have Pensions.............
Old 08-09-2006, 12:36 PM   #51
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Re: Those Who Don't Have Pensions.............

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Originally Posted by Will Work 4 Beer
Yes, $313/month would be the real return, since next year (or whenever the inflation adjustment is done) it will be 1.X * $313 a month.*
WW4B, is there a cap on the inflation adjustment? For example, if a given year showed 10% inflation, would the following year's factor be 1.1? Or would it be something less than this?

Thanks-
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Re: Those Who Don't Have Pensions.............
Old 08-09-2006, 12:42 PM   #52
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Re: Those Who Don't Have Pensions.............

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Originally Posted by Will Work 4 Beer
Re: CPI being higher/lower than your real CPI.* That could be, but firecalc, stock historical returns, etc. are also premised on being compared to CPI.* So still seems pretty apples-to-apples to me.
M
Whay happens to your real CPI is all that matters. To the extent that you can manage it below the offical CPI, you can improve your odds of not outliving your money. So if CPI is running at 2% and you are running at 1.5%, you will be drawing less money each year than you had planned. And your nestegg will last longer.
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Re: Those Who Don't Have Pensions.............
Old 08-09-2006, 01:06 PM   #53
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Re: Those Who Don't Have Pensions.............

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WW4B, is there a cap on the inflation adjustment? For example, if a given year showed 10% inflation, would the following year's factor be 1.1? Or would it be something less than this?
Hmm. on vanguard.com, it says the inflation adjustment is capped at 10% annually (and on the downward side at the level of your initial payment).

I'm not sure that this risk is any worse than what > 10% CPI would mean for stocks.

This also gives you a ~100% success rate (minus whatever the superinflation risk and whatever the AIG-goes-under risk is) vs. the 93-95% success rate of 4% SWR.

Just something to think about. Not sure how I will structure my RE portfolio.
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Re: Those Who Don't Have Pensions.............
Old 08-09-2006, 04:04 PM   #54
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Re: Those Who Don't Have Pensions.............

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Originally Posted by Will Work 4 Beer
Hmm.* on vanguard.com, it says the inflation adjustment is capped at 10% annually (and on the downward side at the level of your initial payment).*

I'm not sure that this risk is any worse than what > 10% CPI would mean for stocks.*

This also gives you a ~100% success rate (minus whatever the superinflation risk and whatever the AIG-goes-under risk is) vs. the 93-95% success rate of 4% SWR.

Just something to think about.* Not sure how I will structure my RE portfolio.
Overall, this sounds like a strong contender for fixed income allocations. Given enough money, I would prefer TIPS becasue of no cap on adjustment. But still, it appears that you would be getting quite a lot for your money here.

Thanks for mentioning this.

HA
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Re: Those Who Don't Have Pensions.............
Old 08-09-2006, 04:13 PM   #55
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Re: Those Who Don't Have Pensions.............

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Overall, this sounds like a strong contender for fixed income allocations. Given enough money, I would prefer TIPS becasue of no cap on adjustment.
But your inflation-adjusted after-taxes returns from TIPs will be still wiped out if CPI > 10%, right?
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Re: Those Who Don't Have Pensions.............
Old 08-09-2006, 10:01 PM   #56
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Re: Those Who Don't Have Pensions.............

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But your inflation-adjusted after-taxes returns from TIPs will be still wiped out if CPI > 10%, right?
Well, to* degree yes. Taxes are tough on capital income during heavy inflation. Best thing to do is get a job in those circumstances.

Ha
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Re: Those Who Don't Have Pensions.............
Old 08-10-2006, 06:39 AM   #57
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Re: Those Who Don't Have Pensions.............

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Originally Posted by HaHa
Overall, this sounds like a strong contender for fixed income allocations. Given enough money, I would prefer TIPS becasue of no cap on adjustment. But still, it appears that you would be getting quite a lot for your money here.

Thanks for mentioning this.

HA
There is only one real problem that would stop me cold on this idea: exposure to the indurer issuing the annuity. Intellectually, I highly doubt that AIG will ever put its life insurance policyholders at at risk of default. Having said that, they are one of the financial institutions that I will never do business with.

Any other insurers you've seen offering CPI indexed payout annuities?
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Re: Those Who Don't Have Pensions.............
Old 08-10-2006, 12:56 PM   #58
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Re: Those Who Don't Have Pensions.............

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Intellectually, I highly doubt that AIG will ever put its life insurance policyholders at at risk of default.* Having said that, they are one of the financial institutions that I will never do business with.
Now that Greenberg's gone, is it a new, kinder, gentler AIG?
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Re: Those Who Don't Have Pensions.............
Old 08-10-2006, 01:03 PM   #59
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Re: Those Who Don't Have Pensions.............

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Now that Greenberg's gone, is it a new, kinder, gentler AIG?
I still won't do business with them. I doubt Greenberg took all the other assholes that run that company with him.
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