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Old 12-05-2007, 08:03 AM   #41
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Maybe I am missing something (very likely), but does Fidelity have a Wellesley fund counterpart?
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Old 12-05-2007, 09:21 AM   #42
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Isn't that a bit of an apples and prunes comparison? The annuity guys aren't going to assume you'll live to 100.

For example, they'll assume a 70 year-old will live to 83.

FIREcalc will give you a 7.12% SWR for that case.
That's the beauty of immediate annuities, risk pooling. The annuity guys only have to assume that the average life expectancy is 83, you can live as long as you want. Some people will croak early, with their money being transferred to those people that croak late. If I die early, I don't need the money, I'm dead. I don't have to care how long they expect me to live.

Let's say the question is "how much can I withdraw from my portfolio and have it last for the rest of my life?" If I can withdraw with certainty 5-6% inflation adjusted every year for no matter how long I live, or I can withdraw with uncertainty 3-4% inflation adjusted every year but only for 30-35 years, then the real annuity might look pretty good unless I had some bequest motive. Of course, if I had a bequest motive, I could just annuitize a large portion of my money in a real annuity now to match the 4% SWR and then give the money to my hiers now.

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Old 12-05-2007, 09:25 AM   #43
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Wouldnt work for me. My 3 year old would simply wipe toys'r'us out of trucks in seven seconds and the money would be gone...
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Old 12-05-2007, 11:26 AM   #44
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Wouldnt work for me. My 3 year old would simply wipe toys'r'us out of trucks in seven seconds and the money would be gone...
On the other hand, my 29-year-old would wipe Payless out of shoes in five seconds, the money would be gone, and she'd be $20K in the hole... (groan!)
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Old 12-05-2007, 12:00 PM   #45
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That's the beauty of immediate annuities, risk pooling.
Right. Which is why annuities really can't be directly compared to a SWR. The "safe" part of the SWR means that you're making the decision to bet against likely outcomes and withdraw only enough for the worst-case outcome. Insurers can play the likely outcome game for both lifespan and investment returns.

Maybe we need a new type of investment product. Sort of a mutual fund that distributes payouts based on likely outcomes. A non-profit insurance company that only issues annuities.
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Old 12-05-2007, 12:33 PM   #46
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Right. Which is why annuities really can't be directly compared to a SWR. The "safe" part of the SWR means that you're making the decision to bet against likely outcomes and withdraw only enough for the worst-case outcome. Insurers can play the likely outcome game for both lifespan and investment returns.

Maybe we need a new type of investment product. Sort of a mutual fund that distributes payouts based on likely outcomes. A non-profit insurance company that only issues annuities.
Well, I guess I was trying to show that the immediate annuity could increase the amount that one could "safely" withdraw out of a retirement portfolio. Or on the flip side, the immediate annuity could increase the portfolio survivability for a given withdrawal rate. Apparantely, I didn't do that great a job. ;-(

btw - if you want a better comparison of using annuities vs not check out Making Retirement Income last a Lifetime [not that it uses a 65 yr old person, so you'd want to do the same sort of thing with FIREcalc with your age and annuity payments] or Bob's page.

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Old 12-05-2007, 01:53 PM   #47
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I agree with you. In theory, an annuity income should always be higher than the SWR. On an individual basis, we all have to be overly conservative. On a collective basis, we can be much less conservative because we have a better idea about when we'll croak statistically than individually.

From the 70 year-old example, we can see that the insurance company drag is at least 1.5% per year. And that's still assuming worst-case investment returns. Best-case investment returns would increase that drag to over 7%/year.

So, my obscured point is that we need a new product. I want to give Vanguard all my money and have them pay me an income based on the expected lifespan of all the people in the pool. And I want it for 20bp per year.
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Old 12-05-2007, 02:02 PM   #48
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So, my obscured point is that we need a new product. I want to give Vanguard all my money and have them pay me an income based on the expected lifespan of all the people in the pool. And I want it for 20bp per year.
I guess you are joking. Because I guess you must know that this can't be done. This is because an S.P.A. is an insurance product, not solely an investment product. So the underwriter is taking risks, even though they have the law of large numbers working for them.

Not only that, 20bp would not even handle the administrative costs. The insurance company has larger regulatory burdens; it must hire actuaries, etc., etc.

Ha
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Old 12-05-2007, 02:06 PM   #49
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I just want to minimize those costs. Currently, the drag is too high to make the product attractive to ERs. In theory, it should be attractive to ERs. Basically, I want to buy into a non-profit pension plan. But I'm willing to pay a small fee.
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Old 12-05-2007, 02:20 PM   #50
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the last few exchanges have been very helpful to my understanding of annuities. Thanks
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Old 12-06-2007, 05:22 PM   #51
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... the immediate annuity could increase the amount that one could "safely" withdraw out of a retirement portfolio. Or on the flip side, the immediate annuity could increase the portfolio survivability for a given withdrawal rate.
This is all true. There are three downsides:

1. The company may go belly up, leaving you with nothing.
2. Your heirs get nothing.
3. You lose access to the money.

All three of these suggest not putting more than half, but many say
1/4th, or one's egg into SPIA; and diversifying risk by putting that
amount with more than one company.

So far, I've SPIA'ed about 7% of my egg (it was the amount sitting
in an after-tax annuity that I didn't like). I also annuitized part of a
TIAA-CREF retirement account (also about 6-7% of egg) because that
made me qualify for life-time free health insurance (hard to argue
with that one).

There was also an interesting paper FPA Journal paper recently
cited, that outlined a strategy of annuitizing WHEN a person's egg
got small enough to just barely afford a SPIA that would cover their
income requirements - "Modern Portfolio Decumulation: A New
Strategy for Managing Retirement Income". Hoping of course
that that never comes to pass !
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Old 12-06-2007, 07:30 PM   #52
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Quote:
Originally Posted by Sandy View Post
Maybe I am missing something (very likely), but does Fidelity have a Wellesley fund counterpart?
Not that I know of but what you can do is buy the dividend etf DVY yielding 3.5% and buy the total bond market etf BND yielding 4.80% and you have a similar mix as Wellesley. Put 40% in DVY, 60% in BND and you get a combined yield of 4.28%. Basically the same thing without any capital gains distributions.
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Old 12-06-2007, 07:32 PM   #53
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This is all true. There are three downsides:

1. The company may go belly up, leaving you with nothing.
2. Your heirs get nothing.
3. You lose access to the money.

All three of these suggest not putting more than half, but many say
1/4th, or one's egg into SPIA; and diversifying risk by putting that
amount with more than one company.

So far, I've SPIA'ed about 7% of my egg (it was the amount sitting
in an after-tax annuity that I didn't like). I also annuitized part of a
TIAA-CREF retirement account (also about 6-7% of egg) because that
made me qualify for life-time free health insurance (hard to argue
with that one).

There was also an interesting paper FPA Journal paper recently
cited, that outlined a strategy of annuitizing WHEN a person's egg
got small enough to just barely afford a SPIA that would cover their
income requirements - "Modern Portfolio Decumulation: A New
Strategy for Managing Retirement Income". Hoping of course
that that never comes to pass !
Thanks John that was an interesting article. The "don't annuitize until you absolutely have to" part is interesting. I suppose an application of this would be that if you start retirement with not very much savings, you'll have to annuitize virtually everything up front. Does that sound right?

Another approach, which people may or may not be more comfortable with [I personally would], is outlined in David Babbel's Investing Your lump Sum at Retirement, which is basically to "Begin by annuitizing enough of your assets so that you can provide for 100% of your minimum acceptable level of retirement income."

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Old 12-06-2007, 08:25 PM   #54
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It all sounds good for a regular retiree. Still uncertain as to how well it flies over a really long period of time.

I was chatting with someone the other day who mentioned an interesting item. The last civil war widow passed away a few years ago. Seems it sometimes happened that a very young lady would marry one of the elder veterans, provided them with care in their final years, then collected their war pension.

She was still collecting the $50 a month confederate veterans pension from Alabama that must have been quite a princely sum back in the late 1920's...
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Old 12-06-2007, 09:37 PM   #55
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Not that I know of but what you can do is buy the dividend etf DVY yielding 3.5% and buy the total bond market etf BND yielding 4.80% and you have a similar mix as Wellesley. Put 40% in DVY, 60% in BND and you get a combined yield of 4.28%. Basically the same thing without any capital gains distributions.
Dawg52, Thanks. I had never found anything that looked similar, thought maybe I was just not searching well enough - and thanks for the "formula"
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Old 12-07-2007, 07:45 AM   #56
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OK, now here are some REAL numbers comparing Wellesley with a couple of annuities I have been thinking about.

Looking at the distributions from Wellesley for the past year, it looks like the yield is about 4.2% if you just take the dividends and let the rest grow to balance inflation.

The TSP offers MetLife immediate fixed lifetime annuities, both with and without inflation adjustment. For a single person, age 62, and in the present interest rate environment (which affects the amount of payout agreed upon but not after the annuity is begun), here are the monthly yields on each $100K before taxes:

(1) $682/month: annuity, no inflation protection
(2) $494/month: annuity, inflation protected
(3) $353/month: Wellesley, with assumed 4.2% dividends

Or, looking at it another way, I could get the same income from (3) as from (2) by investing 1.4 times as much money. The % dividends for Wellesley could change but apparently (hopefully) they are pretty stable. (1) is really not comparable since it does not include increase with inflation.

Given my new (still hypothetical) circumstances with the inheritance, which is supposed to add a few hundred thou (but not millions) to my ER plan, I think I can afford to just use Wellesley for the needed enhancement to my fixed income portion. If I am only withdrawing the dividends, it will grow to nearly match inflation all by itself.

It's a stiff price to pay for control, but for me it is probably worth it. Still thinking but leaning towards Wellesley.
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Old 12-07-2007, 08:27 AM   #57
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Given my new (still hypothetical) circumstances with the inheritance, which is supposed to add a few hundred thou (but not millions) to my ER plan, I think I can afford to just use Wellesley for the needed enhancement to my fixed income portion. If I am only withdrawing the dividends, it will grow to nearly match inflation all by itself.
You just described my situation. I think I can easily get by on dividends and interest to support my retirement lifestyle. I haven't totally written off a small immediate annuity but I'm having a tough time justifying one.
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Old 12-07-2007, 09:02 AM   #58
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Without resurrecting an ancient thread - I view my non cola pension and early SS as 'effectively annuities.' which kicked in at 55 and 62 (now 64).

And NO! - I do not fiddle around with x times the income or net present value calculations to giggle around asset mix.

On cold winter nights - I sometimes take the no 2 pencil vs expenses and do a hard times/what if I needed to live off income streams check.

Roth and maybe fixed annuities are vaguely 'on the table' if I fail to croak precisely at the IRS expected 84.6 or RMD doesn't get it done.

heh heh heh - good to go for now - I have maybe 20 yrs to putz.
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Old 12-07-2007, 09:32 AM   #59
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Without resurrecting an ancient thread - I view my non cola pension and early SS as 'effectively annuities.' which kicked in at 55 and 62 (now 64).
Me too. But my cola pension and SS together add up to a pretty measly sum, in my case, even if I wait until 66 for SS. You are only 5 years older than me, you young thing! 59.5 years old here and aging fast.

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And NO! - I do not fiddle around with x times the income or net present value calculations to giggle around asset mix.

On cold winter nights - I sometimes take the no 2 pencil vs expenses and do a hard times/what if I needed to live off income streams check.[/
I think we are on the same wavelength, here. I am working with "what do I need/want in 2007 dollars to live on", especially under rock bottom, bad market conditions. What if the market crashes, and inflation hits, and the economy is in the toilet for ten years or so. That kind of thing. In that case, I would like to ensure more (reliable, fixed) income than SS/pension will provide.

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Roth and maybe fixed annuities are vaguely 'on the table' if I fail to croak precisely at the IRS expected 84.6 or RMD doesn't get it done.

heh heh heh - good to go for now - I have maybe 20 yrs to putz.
I think the TSP annuity is probably the best deal I could get from a company as solid as MetLife, and the TSP has rules about when it can be purchased that would prevent me from waiting that long to buy it.

So, the annuity's function (or Wellesley's function) in my case would be to supplement my pension/SS fixed income stream for my entire ER, rather than just to provide for my old age.
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Old 12-07-2007, 09:39 AM   #60
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You just described my situation. I think I can easily get by on dividends and interest to support my retirement lifestyle. I haven't totally written off a small immediate annuity but I'm having a tough time justifying one.
It doesn't sound like you need one, unless later on when you are in your 80's (such as UncleMick is proposing). Maybe I don't either.

Still, I have to admit that I like the idea of income coming from a variety of sources. However, I'm not sure buying an annuity is worth it, for me. Still kicking the idea around, though.
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