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To SPIA or not to SPIA - a new study
Old 07-27-2013, 06:16 PM   #1
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To SPIA or not to SPIA - a new study

how ironic that a joint venture between dr pfau and michael kitces came to the conclusion spending other sources of income first while allowing stocks to grow grew more money than conventionally drawing from stocks early on.


Understanding The True Impact Of Single Premium Immediate Annuities On Retirement Income Sustainability - Kitces | Nerd's Eye View


Mod note - this thread was hived off from the Ray Lucia banning thread.
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Old 08-03-2013, 12:04 PM   #2
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Originally Posted by mathjak107 View Post
how ironic that a joint venture between dr pfau and michael kitces came to the conclusion spending other sources of income first while allowing stocks to grow grew more money than conventionally drawing from stocks early on.


Understanding The True Impact Of Single Premium Immediate Annuities On Retirement Income Sustainability - Kitces | Nerd's Eye View
Wow - this is a big deal and deserves its own thread!

Pretty much throws out SPIA supplemental strategies. When to take SS can be optimized for longevity risk, but otherwise forget the SPIA.

I'll have to seriously consider NOT reducing my equity exposure as I age. Much more study required, of course, but this wakes me up!

Kitces captures some gems.
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Old 08-03-2013, 12:28 PM   #3
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i think that was one of the most eye opening studies in a long time.
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Old 08-03-2013, 12:45 PM   #4
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I have always planned to maintain constant AA as I age, and not to cut down on equities. This is now affirmed as a reasonable thing to do.
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Old 08-03-2013, 01:48 PM   #5
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Wow - this is a big deal and deserves its own thread!

Pretty much throws out SPIA supplemental strategies. When to take SS can be optimized for longevity risk, but otherwise forget the SPIA.

I'll have to seriously consider NOT reducing my equity exposure as I age. Much more study required, of course, but this wakes me up!

Kitces captures some gems.
+1 - this deserves it's own thread.

Great read. Mathjak, thanks for sharing the link.
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Old 08-03-2013, 02:48 PM   #6
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Originally Posted by mathjak107 View Post
how ironic that a joint venture between dr pfau and michael kitces came to the conclusion spending other sources of income first while allowing stocks to grow grew more money than conventionally drawing from stocks early on.


Understanding The True Impact Of Single Premium Immediate Annuities On Retirement Income Sustainability - Kitces | Nerd's Eye View
This was really interesting. He mentions in the article another article finding that traditional cash bucket strategies to keep from drawing from the portfolio during bear markets don't work as well as more typical portfolios that don't have the cash buckets because putting so much money into a cash bucket is an overall drag on performance.

He says in the SPIA article:

Quote:
n the other hand, it's notable that at least this SPIA form of bucket strategy was improving retirement outcomes, a notable difference from cash reserve "buffer zone" bucket strategies that have been shown to decrease income sustainability!
However, he doesn't explain why the SPIA form of bucket strategy is successful while the typical cash bucket strategy isn't. I guess it is because in the typical cash bucket strategy you rebalance and always keep the cash bucket forever while with the SPIA form of bucket strategy you don't replenish the cash bucket and you don't rebalance. However, I wish this was more explicitly explained.
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Old 08-03-2013, 03:49 PM   #7
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Originally Posted by Katsmeow View Post
This was really interesting. He mentions in the article another article finding that traditional cash bucket strategies to keep from drawing from the portfolio during bear markets don't work as well as more typical portfolios that don't have the cash buckets because putting so much money into a cash bucket is an overall drag on performance.

He says in the SPIA article:



However, he doesn't explain why the SPIA form of bucket strategy is successful while the typical cash bucket strategy isn't. I guess it is because in the typical cash bucket strategy you rebalance and always keep the cash bucket forever while with the SPIA form of bucket strategy you don't replenish the cash bucket and you don't rebalance. However, I wish this was more explicitly explained.
In one case they're using cash buckets, in another they are using bonds. And, yes, they aren't replenishing the bond allocation either, but letting it dwindle down as it is being drawn from - thus the AA keepings getting more aggressive with time.
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Old 08-04-2013, 08:18 AM   #8
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I have always planned to maintain constant AA as I age, and not to cut down on equities. This is now affirmed as a reasonable thing to do.
Especially as you are already at 70% equities!
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Old 08-04-2013, 08:20 AM   #9
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Thanks Mathjak for pulling this section out into a new thread where it can gain a wider audience!
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Old 08-04-2013, 09:23 AM   #10
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I started a thread which was an offshoot of that paper about cash buffers( which I only found by reading about the SPIA paper mentioned in this thread:

Cash buffer yields

I argue that the cash buffer bashing makes some assumptions about cash yields which could be unrealistically or irresponsibly low. With higher yielding cash vehicles I wonder if the buffer performs better.
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Old 08-04-2013, 12:04 PM   #11
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Thank you for highlighting Kitces and Pfau’s latest research. Their study supports guidance published by Laurence J. Kotlikoff and Scott Burns in their 2008 book, Spend ‘Til the End. On page 248 they express,

Quote:
Uncertainty about benefits is greatest in our late forties and fifties, when the benefits are close enough to smell and big enough to matter, but not yet available to touch. Once we hit our golden years and start collecting these benefits, it’s not likely that the government will snatch them away. This pattern of benefit uncertainty with age suggests reducing your stock holdings as you approach retirement but increasing them thereafter. [emphasis added]
They take this a step further by saying,

Quote:
Health expenditure uncertainty is greatest when we reach older age, roughly age eighty. This uncertainty suggests a smaller allocation to stocks in our advanced years.
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Old 08-04-2013, 03:57 PM   #12
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Thanks Mathjak for pulling this section out into a new thread where it can gain a wider audience!
Thanks to Moderator also.
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Old 08-04-2013, 06:02 PM   #13
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My spreadsheet still includes SPIAs bought in 21 years, after age 70. Of course I reserve the right to change my mind by then if I am still alive :-)
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Old 08-04-2013, 07:09 PM   #14
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i asked about this idea over three years ago (see post 83)

Immediate Annuities

and I didn't get any positive responses. I still think a SPIA can substitute for a large bond allocation and also allow you to increase SWR on the non-SPIA portion of your portfolio.

As an additional point, I think postponing SS past 62 also allows you to increase SWR from 4% to 5% for those years from 62 to eventually taking out SS then lowering by same amount as SS received (or some adjustments to maintain same long term risk).

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Old 08-05-2013, 09:30 AM   #15
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Thanks mathjak. Isn't that interesting, Pfau (who I've read with interest over the past few years) has seemed more and more inclined to advocate for annuitization/"floor income" (without any commercial interest, so genuinely IMO) - and now Kitces names him as a co-author discouraging SPIAs except for extreme longevity cases. Once again:
  • Statistics can be applied to anything, doesn't mean the results are meaningful, aka GIGO.
  • You can find a convincing argument for almost anything you want to believe on the internet.
  • Caveat emptor...
My plan remains, I plan/hope to avoid buying a SPIA (especially at today's historically high costs/low returns), but I have not ruled it out when we get to our 70-80's. Unfortunately (from a financial planning POV) we do expect to live into our 90's based on both family histories...
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Old 08-05-2013, 10:07 AM   #16
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I noticed that the paper talked about using Monte Carlo simulations, but (I was reading quickly) did not notice anything about using Firecalc or a similar historically-based method of testing.

If your portfolio was heavily in equities and you were 75 years old when the market took a deep and prolonged dump, seems like you might have lived the rest of your life in poverty.

Other sources of portfolio "stability" are not just bonds now, but also include CD's, foreign bonds, SPIAs, etc.

Discussion?
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Old 08-05-2013, 12:48 PM   #17
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I noticed that the paper talked about using Monte Carlo simulations, but (I was reading quickly) did not notice anything about using Firecalc or a similar historically-based method of testing.

If your portfolio was heavily in equities and you were 75 years old when the market took a deep and prolonged dump, seems like you might have lived the rest of your life in poverty.

Other sources of portfolio "stability" are not just bonds now, but also include CD's, foreign bonds, SPIAs, etc.

Discussion?
Hopefully you had 10 years of great equity gains before you hit 75. That may have reduced your WR. And at 75 you only have to plan for 20-22 years remaining and can sustain a higher WR. And you should be internationally diversified as well. So a U.S. market bear at 75 is not the end of the world.
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Old 08-05-2013, 01:15 PM   #18
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Hopefully you had 10 years of great equity gains before you hit 75. That may have reduced your WR. And at 75 you only have to plan for 20-22 years remaining and can sustain a higher WR. And you should be internationally diversified as well. So a U.S. market bear at 75 is not the end of the world.
This just does not seem reasonable considering the individuals who will be making these decisions. Really a 75-90 % Stock allocation at age 75 when mental facilities are in decline and need for money for medical resources and potentially high cost assisted living will be at it's peak? Stock markets can and will decline 80-90 percent or more, I do not see how a retiree could possibly endure this and to not plan for this contiginecy is reckless to me. That this is being marketed to financial planners will lead to too many individuals who will not have the intestinal fortitude to be able to stick to the plan when the super bear market comes along (despite the fact that Helicopter Ben believes he can keep them away forever).

I have not looked into detail in the study other than to skim the surface, but superficially the logic appears flawed to me. I will have to try in the next couple of days to study the details quite a bit more. This to me is akin to a pension fund claiming that over the long term they will earn 8 percent per year and therefore aren't underfunded while depleting their base funds (see Illinois pension fund declining to a less than 45 percent funding level by next year).
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Old 08-05-2013, 01:27 PM   #19
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Not sure he said that exactly, but if for example one has a COLAd pension that takes care of all your income needs, you can have a very high equity allocation at an advanced age. Too bad we usually don't know the details that accompany many posts...we often don't know who's FIRE, who's SIRE, or where in between.
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Old 08-05-2013, 03:01 PM   #20
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This just does not seem reasonable considering the individuals who will be making these decisions. Really a 75-90 % Stock allocation at age 75 when mental facilities are in decline and need for money for medical resources and potentially high cost assisted living will be at it's peak? Stock markets can and will decline 80-90 percent or more, I do not see how a retiree could possibly endure this and to not plan for this contiginecy is reckless to me.
Really? Stock markets will decline 80% or more? Really?

I probably won't be increasing my equities as I get older. I don't like the idea of taking on increasing risk as I get older. I may have to think about this more, but I expect by age 75 I'll feel quite certain that my plan is working and I won't need high returns and the risk that go along with them.
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