FYI: Ben Stein's views on asset allocation.

[2B]

2B,

Your points are well taken. Interestingly, you do much better on a lifetime annuity (yield-wise) than you do on a fixed term annuity (say, 15 years) because -- I believe, the fixed annuities alway pay out in full, whereas the life annuities allow the company to spread the risk, ending payouts when you die; I double-checked and indeed a 60 year male old life-only annuity pays well over 7%.

If it paid in the 4s or 5s, I'd pass. At 7.4% it gets my attention.

Cheers.

Please understand that your return isn't 7.4%. That is the payout with the value at the end of the term zero (at your death). The rate of return is about 4.7%. Part of what you are seeing as 7.4% includes return of your initial investment.

You can do better with a ladder of 5.3% CDs except you can't assure you will die on any specific date. There is a reduction in return due to the life annuity aspect.

 

[Rich_by_the_Bay]

Ah but Rich, you automatically tie the self annuity end's arms behind its back by forcing it into a non-equity holding position.

Yes, I see your point. Since one of the advantages of an IA is reduced volatility, I tried to use a comparable investment on the self-annuity side. If you figure more traditional investments rather than bedrock investment, the analogy starts to unravel a bit -- apples and oranges.

This has proven helpful. I think the two are a pretty close call depending on personal preferences. If not right for everyone, I think the summary dismissals of an IA component in certain doses and circumstances are exaggerated.

Thanks for your observations. You are a lot smarter than everyone here told me you were...

 

[cute fuzzy bunny]

Thanks for your observations. You are a lot smarter than everyone here told me you were...

No i'm not. I copied off of someone elses paper

 

[Rich_by_the_Bay]

Please understand that your return isn't 7.4%. That is the payout with the value at the end of the term zero (at your death). The rate of return is about 4.7%. Part of what you are seeing as 7.4% includes return of your initial investment.

You are right, that's what I meant.

That's why I compared it to a 30-year annuitized investment (zero balance at the end) and it seems that the equivalent to a 7.4% annuity is more like a 6.3% one-time investment annuitized over 30 years.

Thanks for the clarification of my fuzzy terminology.

 

[jdw_fire]

OK let me try from another angle, an example.  The facts for this example are a couple (both 60 years old) wants to retire with $100,000 of assets that can be used for income production (this number is arbitrary as the numbers in this example are scalable, if its size troubles you multiply it by 10 or 100 or whatever, just remember that all the dollar values in this example need to be multiplied by the same number).  Reading an article by Henry Hebeler dated 3/8/05 entitled "An Appeal for Better Planning” we would be foolish to use less than 40 years (and this may not even be long enough) for our FIRECalc calculation.  Also, I have read several posts here that suggest planning for a long life.  With a 50/50 portfolio split, a starting W/D of $3386 gets us a success rate of 100%.  If now we go to Vanguard’s site and look at inflation protected immediate annuities we need to spend $65,424.64 to get the same starting income rate from said annuities, leaving $34575.36 for you to invest however you see fit.  (I should note I would actually propose buying 2 individual life annuities each providing half the W/D amount stated above, one for each member of the couple.  This technique actually provides the income for a smaller initial payment then a single annuity with a 50% spousal benefit.  When one of the couple dies the other will only have half of the inflation adjusted income from an annuity, but 1) it shouldn’t cost as much for a single person to live as the couple and 2) remember that there is still the $34575.36 that has been invested from the date of retirement until the first spouses death without a need for withdraw up to this point.  If additional income is needed at this point that money is then used to buy another inflation protected immediate annuity for the surviving spouse or if the surviving spouse has the capability and inclination to manage the assets for additional withdraw s/he can do so.  Please note that the longer the time between their retirement and the death of the first spouse the larger the payment stream will be on a newly purchased inflation protected immediate annuity for any given purchase price.) 

This analysis is even better for a single person since the annuity costs only $62614.65 and the $37385.45 remaining portfolio after the initial purchase of an inflation protected immediate annuity will never have to be used to make up lost income when a spouse dies.

I used here an extreme example (i.e. a very large annuity) to try and show my point as clearly as possible however as I said in an earlier post maybe a better solution is to use the annuity to provide the bare bones amount necessary for retirement and let the success of the remaining portfolio provide for discretionary expenses.

Before anyone flames me please consider some of the benefits of this approach. 
     - potentially less need for management/monitoring of your portfolio (just put the $34575.36 remaining portfolio into an index fund for 40 years)
     - using FIRECalc the residual values after 40 years are higher with the annuity ($34,575 – $1,274,044 w/ avg $416,137) than w/o ($72 – $634,124 w/ avg $181,113)
     - if someone really couldn’t stand working any more they could actual retire with fewer assets without giving up safety or income

If you still don’t think this a financially viable solution please explain why?  In this explanation please remember that the past performance of the stock and bond markets is no guaranty of future performance.

 

[2B]

That's why I compared it to a 30-year annuitized investment (zero balance at the end) and it seems that the equivalent to a 7.4% annuity is more like a 6.3% one-time investment annuitized over 30 years.

Here again it's tough to compare a "lifetime" annuity because of the inherent reverse life insurance. A large group of 60 year old men would all not be expected to live to 90. A few 60 year old men would and they would be getting the 6.3% return. Many would die in their 70's and subsidize the higher return for the few survivors.

 

[2B]

If you still don’t think this a financially viable solution please explain why?  In this explanation please remember that the past performance of the stock and bond markets is no guaranty of future performance.

Hey! Go for it if it makes you feel better. You can go all the way and a single person can get a 5.1% inflation adjusted payout. I didn't run the two individual annuities with 50% spousal benefits.

Key points to consider. Your money is now gone and you are a creditor of the AIG subsidiary that sold you your annuity. What's their credit rating now? What will be their credit rating be when a cure for old age is discovered and their annuitants live forever? What will their credit rating be when the stock market falls 80%? What is their inflation adjustment based on? I didn't see anything displayed too prominently.

Not my cup o' tea at this point in my life but I think it is a valid approach for a fixed income portion. I would be concerned if too much of a portfolio was committed to this. I still believe you can get a better return with your own laddered CDs and bonds. The 5.1% payout doesn't excite me expecially with all capital depleted upon your death.

When you run FireCalc, there is the "residual" that can always be used to juice the payout if there is an end of life issue. You can't do that with an annuity.

If you follow Guyton, you can withdrawl up to 6.2% inflation adjusted. Of course, there you have to be willing to adjust withdrawls with portfolio swings. I actually think our currently retired bretheren do that now even if they limit themselves to 4% or less. I wish I was their heirs (and they were a lot older).

 

[unclemick]

Hmmm

Ballpark 40% of spending from early SS plus non cola pension with 5% of Vanguard Target 2015 variable takeout for the rest except for 7% in Roth VG Lifestrategy mod for my old age.

13th year of ER - single, no heirs to speak of - age 62/63.

Annuity is an option for my 80's - if I need it.

heh heh heh heh heh - more than one way to skin a cat. Party on.

 

[cute fuzzy bunny]

If you still don’t think this a financially viable solution please explain why? In this explanation please remember that the past performance of the stock and bond markets is no guaranty of future performance.

There are "guarantee" problems in both approaches.

In one, you're creating doubt about the viability over a decades long period of the financial market of the greatest economy the world has ever known and hundreds of millions, perhaps billions, of investors.

In the other, the long term financial viability of a single company, and your own individual mortality.

But the good news is, with the latter one you get less money and nothing at the end for your heirs/charities. But its guaranteed. If the company is still in good shape and you're still alive.

Ask the people who worked for 25-30 years for the biggest blue chip companies of the 50's/60's/70's who are now losing their pensions and medical benefits how well that faith worked out for them.

And if you want less management/monitoring of your portfolio, just buy Target Retirement xxxx and dont look at it again. Just cash the dividend checks and when needed, sell shares to suit your spending needs.

 

[unclemick]

Crap! - second cup of coffee.

Pssst - Wellesley. (lest I forget).

heh heh heh heh heh heh heh heh - Annuity! We don't need no stinking annuity. Unless of course it works for your situation.

 

[jdw_fire]

2B, thanks for taking the time to review and comment on my example, let me now address your comments

Key points to consider.  Your money is now gone and you are a creditor of the AIG subsidiary that sold you your annuity.  What's their credit rating now?  What will be their credit rating be when a cure for old age is discovered and their annuitants live forever?  What will their credit rating be when the stock market falls 80%?  What is their inflation adjustment based on?  I didn't see anything displayed too prominently.

On your key points 1) your money is not "now gone".  You have two annuities AND $34,575 invested in what ever you want to invest it in!  2)Your question on the AIG subsidiary's credit rating now is a valid point and I suppose you could spread this risk by buying smaller annuities from multiple companies, kind of like a mutual fund.  3) Your next credit rating question on a cure for old age is just an emotional argument not based in fact.  4) Your next question applies as much to your ideas about a portfolio and self annuitizing as it does to my example.  5) CPI

Not my cup o' tea at this point in my life but I think it is a valid approach for a fixed income portion.  I would be concerned if too much of a portfolio was committed to this.  I still believe you can get a better return with your own laddered CDs and bonds.  The 5.1% payout doesn't excite me expecially with all capital depleted upon your death.

When you run FireCalc, there is the "residual" that can always be used to juice the payout if there is an end of life issue.  You can't do that with an annuity.

I'm glad that you are at least willing to consider that the annuity might be a valid substitute for the income portion of a portfolio, however I think that when you state that you could do better laddering CDs and Bonds you are forgetting how low interest rates were just a year or so ago.  The annuity would lock in an inflation adjusted income stream for your entire life.  I don't think your ladder will do that since it would require a different CD or bond for each year of your remaining life to be purchased now to prevent having to purchase when interest rates are lower.

There is a "residual" with the annuity also, remember the $34,575 invested in what ever you want to invest it in.  If invested in an S&P 500 index fund it would yield a larger residual than the self annuitizing plan laid out by FIRECalc.  Look back at my example "using FIRECalc the residual values after 40 years are higher with the annuity ($34,575 – $1,274,044 w/ avg $416,137) than w/o ($72 – $634,124 w/ avg $181,113)"

If you follow Guyton, you can withdrawl up to 6.2% inflation adjusted.  Of course, there you have to be willing to adjust withdrawls with portfolio swings.  I actually think our currently retired bretheren do that now even if they limit themselves to 4% or less.  I wish I was their heirs (and they were a lot older).

Unlike my example, in Guyton's plan each year's W/D is not always inflation adjusted from the previous year. 

It appears that the only credible concern you express is the viability of the company issuing the annuity and to address that concern (from my comments above) "you could spread this risk by buying smaller annuities from multiple companies, kind of like a mutual fund. " or (from my post that stated the example) maybe a better solution is to use a smaller annuity to provide the bare bones amount necessary for retirement and let the success of the remaining portfolio provide for discretionary expenses.

 

[jdw_fire]

But the good news is, with the latter one you get less money and nothing at the end for your heirs/charities.  But its guaranteed.  If the company is still in good shape and you're still alive.

I don't think you looked at my example closely enough.  You get the same cash flow and the $34575 not spent on the annuity in my example has a larger residual.  Look again at my example and my response to 2B.

 

[Ed_The_Gypsy]

It is interesting what people fix on. Only the first Stein article mentioned annuities, but that is all the rest of the thread is about.

The annuity industry certainly earned a bad reputation, and for sure, I can do better myself on my own, and so can you.

But please go back to the little point I raised originally (and what Uncle Mick referred to, buying an annuity at age 80):

What do I do when I cannot manage my own affairs anymore? (or in anticipation of that situation?)

My parents looked after the affairs of an old family friend. My sister looked after my parents' affairs in their decline. If I am to have a Plan B, in case one or the other of my kids is not up to the task, WHAT ARE MY OPTIONS? Turn the handling of my home-grown distribution plan over to a lawyer or financial planner? You want crazy? THAT is crazy.

Let me ask related questions:
I know that Vanguard can arrange Minimum Required Distributions, and set up a payment schedule, but will they also rebalance my selected funds for me? Or do I have to buy a special fund with a default (i.e., not mine) asset allocation for that? I know they have them. Life-cycle funds or some such.

Actually, I may have just answered my own question! That may be a superior alternative to a variable annuity. What do you-all think? Comments, please!

Ed

 

[Maximillion]

I get stock advice from my 87 year old dad, he just likes to take too much risk.

 

[cute fuzzy bunny]

I don't think you looked at my example closely enough. You get the same cash flow and the $34575 not spent on the annuity in my example has a larger residual. Look again at my example and my response to 2B.

I read your message quite closely. Your presumption that one spouse dying and the other living off the remaining single annuity is the problem. Two really DO live almost as cheaply as one. Sure, you have that 34k-whatever invested to try to fill in the gap. If you invest the whole thing in a balanced portfolio, the death of one partner has no effect, and the total long term growth of the larger portfolio will be even more substantial.

Try doing the same calcs with an annuity with a survivorship option.

But if it feels good to you, you oughta do it.

In my mind, annuities bring one benefit: guaranteed income as long as the insurer is in business. And a whole bunch of downsides and problems.

Granted if you're older, have limited resources and expect a really long lifespan against the IRS life expectancy tables...may be a good option. An income stream, even a small one, also helps portfolio lifespan quite favorably, so a small annuity might be a nice idea. Its just that its 10th or 12th on my list of good places to put my money and I havent gotten past the 3rd or 4th option yet.

 

[Rich_by_the_Bay]

Oy, even I am getting saturated with this annuity thing, but here is a link where Gummy addresses the question.

http://www.gummy-stuff.org/annuity-yes-no.htm

Pretty interesting.

Bottom line: for the assumptions I am comfortable with (8% equity return, 3% inflation, 25% of assets in immed annuity, etc.) the breakeven interest from an annuity to beat a 4% SWR is around 7%. You can get 7.42% today.

Ed - sorry for the inadvertent ambush.

 

[jdw_fire]

Your presumption that one spouse dying and the other living off the remaining single annuity is the problem.  Two really DO live almost as cheaply as one.  Sure, you have that 34k-whatever invested to try to fill in the gap.  If you invest the whole thing in a balanced portfolio, the death of one partner has no effect, and the total long term growth of the larger portfolio will be even more substantial.

Granted the scenario you bring up seems to be the worst case (with the exception of the insurance company defaulting on the annuities) with absolute worst case being one spouse dies shortly after the scenario is put into action.  However, even at that time the $34575 would buy a replacement annuity.  And the longer both spouses live the bigger the $34575 that was invested gets and the cheaper (due to the advancing age of the living spouse) the replacement annuity becomes.  This downside does not exist for a single retiree.

 

[cute fuzzy bunny]

One spouse dying ANYTIME could be a prety bad scenario.

At that point your "safety net" would be used up.

Look at this from another angle.

According to vanguard (and i'm sure their deal isnt the best, but its gotta be competitive)...

If I invest 100,000 in their CPI adjusted annuity with right of survivorship@100% and no cancellation option, the thing would kick out about 3700-3800 a year, depending on which minor options you tweak.

Compare that to investing 100k in vanguards Wellesley fund. Over the last 30 years, investors in this fund have been paid an average dividend of over 4% (4000) a year, while seeing average total returns of over 8%...in other words, more cash flow with a growth of principal that exceeds average CPI. Target Retirement Income looks to have similar capabilities although the track record isnt as long.

No double digit single calendar year losses. No sequential losing years.

Mortality is no issue. Principal is liquid and can be withdrawn at any time. Funds are available for inheritance or charitable purposes.

Given those sorts of options, why would I give up my money to get a lower (but guaranteed) payment with really no other benefits?

I suppose if I was single, had no heirs, and had absolutely zero tolerance for risk...

 

[jdw_fire]

CFB, here is a quote from another thread  made today by samclem in a discussion about SWRs

"I need to take withdrawals from my portfolio in such a way that it lasts for the lifetime of my spouse and I.  The only way to assure that happens is to make withdrawals based on the value of the portfolio.  If inflation goes through the roof and my investments don't, then I can't just ignore it--I'd have to take reduced payouts or risk running out of money.  The sooner I adjust, the better (and seven years, IMO, is too long).

IMO, it makes good sense to decouple your withdrawal strategy entirely from inflation.  Your portfolio should be designed to maintain ground, as well as possible, in an inflationary environment (equities do okay in a moderate inflationary environment, TIPS and commodities might do better if things are severe).  Then just take your withdrawals as a % of your existing portfolio value each year.  If your portfolio  isn't keeping up, you'll be trading away your future abilty to mainatin your lifestyle if you match inflation without regard to the portfolio's value.

The few folks with a COLA'd pension might need less inflaton protection, others will need to include it more extensively in their portfolios."

There is obvious concern here about depleting their portfolio and a willingness to accept non inflation protected W/Ds to ensure that they don't run out of money at the end of their life.  At the end of the post there is also what appears to be a recognition of the value of an inflation protected income stream.  The concern expressed in this post may very well cause a person to delay retiring.  The point of my posts on this thread is that there is another way to address the concern of running out of an inflation protected income stream.

Look at this from another angle.

According to vanguard (and i'm sure their deal isnt the best, but its gotta be competitive)...

If I invest 100,000 in their CPI adjusted annuity with right of survivorship@100% and no cancellation option, the thing would kick out about 3700-3800 a year, depending on which minor options you tweak.

There is a reason that I didn't pick an annuity like this and it is that doing that requires you spend the entire $100,000 instead of only $65425, and thus not having the $34575 leftover to invest.  Granted if one of the spouses die you may then need to use the $34575 to generate income but even in this case you could replace the entire amount of income lost. 

Compare that to investing 100k in vanguards Wellesley fund.  Over the last 30 years, investors in this fund have been paid an average dividend of over 4% (4000) a year, while seeing average total returns of over 8%...in other words, more cash flow with a growth of principal that exceeds average CPI.  Target Retirement Income looks to have similar capabilities although the track record isnt as long.

No double digit single calendar year losses.  No sequential losing years.

So now let us assume neither spouse dies immediately.  If the $34575 left over after buying the annuities I put in my example was invested in a Roth IRA as you said above (with div reinvested since the income is not needed) after one year it becomes $38724.  When they are both 70 it would be $95879.  When they are both 80 it would be $297,786 (almost 3 times what they originally had to retire on) and we still haven't hit the age of their life expectancy when they were 60.  At 90 it would be approximately equal to your scenerio.  So if past performance is a guarantee of the future my example may not be as good as your example but it is not that bad either.  However we both know past performance is not.

Mortality is no issue.  Principal is liquid and can be withdrawn at any time.  Funds are available for inheritance or charitable purposes.

Given those sorts of options, why would I give up my money to get a lower (but guaranteed) payment with really no other benefits?

I suppose if I was single, had no heirs, and had absolutely zero tolerance for risk...

In my example there is still some withdrawable liquid principal and it can be available for inheritance on charitable purposes.  Also the W/D is equal to the SWR produced by FIRECalc (see the details of my example).  (If single this is even  better because death does not require any replacement income.)  However I don't think you have to be single, with no heirs and have absolutely zero tolerance for risk to seriously consider this or its  variants (again see my earlier post).

 

[haha]

I think this is a very useful thread, and should perhaps be moved to "Best OF" when it peters out.

Ha

 

[cute fuzzy bunny]

"I need to take withdrawals from my portfolio in such a way that it lasts for the lifetime of my spouse and I. The only way to assure that happens is to make withdrawals based on the value of the portfolio. If inflation goes through the roof and my investments don't, then I can't just ignore it--I'd have to take reduced payouts or risk running out of money. The sooner I adjust, the better (and seven years, IMO, is too long)....The point of my posts on this thread is that there is another way to address the concern of running out of an inflation protected income stream.

You've hit one of my hot buttons here; actually a couple. For starters, an annuity does not "assure" anything. It may be somewhat more certain than ones own investments, but perhaps you might ask what the insurance company is investing your money in to create the money they're paying back to you, and making a profit on it?

Gosh...probably the same stuff everyone else who self invests does. And if those go bust, so does your annuity payment.

Next, you've done nothing at all to protect yourself from inflation. You're indexing yourself to the CPI. That might = inflation for some, CPI might be a better deal for others. For me, CPI is woefully short of inflation. Most people I know around here on a CPI indexed income are losing about 10-30% of their buying power every decade.

Over the 40-50 years I'll be retired, that'd be a bit of an owie.

My investments might not do any better...but I'm going to have a fighting chance.

There is a reason that I didn't pick an annuity like this and it is that doing that requires you spend the entire $100,000 instead of only $65425, and thus not having the $34575 leftover to invest. Granted if one of the spouses die you may then need to use the $34575 to generate income but even in this case you could replace the entire amount of income lost.

No it doesnt, you can invest any amount. But its an apples to apples comparison...an annuity that pays no matter who dies. Your 'system' of saving a piece and using it to generate income or create another annuity creates a whole layer of complexity and uncertainty that is no better than doing self investing.

This is like many of the other discussions we've had before. People largely have their minds made up and will concoct the system or set of 'facts' that supports the opinion they've arrived at.

Not that theres anything wrong with that.

However, the layers of complexity above are unnecessary. The insurance companies are taking your money and everyone elses money and investing it long term in stocks, bonds and other investment products. They're making their payments. They're making a profit. Over the broad range of customers, some will die early, some will die late, and some will die right on time. On balance, they'll pay out less than they make.

I'd like to keep that profit margin for myself.

But like I said, i'm sure there are people that these make a lot of sense for. Singles with a lack of comfort in investing that feel they can 'make it' on the annuity payment, dont have a long horizon, and have no heirs. Or someone looking for that extra layer of diversification.

 

[jdw_fire]

You've hit one of my hot buttons here; actually a couple.  For starters, an annuity does not "assure" anything.  It may be somewhat more certain than ones own investments

So it provided more assurance than your own plan.

but perhaps you might ask what the insurance company is investing your money in to create the money they're paying back to you, and making a profit on it?

Gosh...probably the same stuff everyone else who self invests does.  And if those go bust, so does your annuity payment.

Actually maybe not.  For example, I was told about one annuity product (a fixed term annuity that guarantees return of principle or 75% of the S&P 500 gain, whichever is greater) that invests in US zero coupons and S&P 500 index options.  I have not read here where anyone is investing in S&P 500 index options (however I admit that I have not read every post on this board).  Also, in the quantity they buy they probably a better deal on transactions costs.  It has professional managers who may be a little smatter than your average individual invester and potentially have access to investments you don't.  There is another way the insurance co. makes money that I discuss below.

And if the stuff you are buying goes bust there goes your annual W/D; so what is your point, that the insurance company goes bust with you?  Probably less likely than you going bust by yourself.

Next, you've done nothing at all to protect yourself from inflation.  You're indexing yourself to the CPI.  That might = inflation for some, CPI might be a better deal for others.  For me, CPI is woefully short of inflation.  Most people I know around here on a CPI indexed income are losing about 10-30% of their buying power every decade.

You may not like CPI as an inflation indicator but that is irrelavant since my example made a comparison to FIRECalc results that uses CPI as its inflation number.

No it doesnt, you can invest any amount.  But its an apples to apples comparison...an annuity that pays no matter who dies. 

Appearantly you were not following my example and I can't take any short cuts with my language.  Therfore let me try to restate the sentance with more words so that hopefully you understand the point I was trying to make. 
- There is a reason that I didn't pick a single annuity with a 100% survivor's benefit and it is that doing that requires you spend the entire $100,000 instead of only $65425 to get the payment stated in the example, and thus not having the $34575 leftover to invest.

The way I stated my example is just as apples to apples as the annuity you infer and it also pays no matter who dies.

  Your 'system' of saving a piece and using it to generate income or create another annuity creates a whole layer of complexity and uncertainty that is no better than doing self investing.

There are no more layers in my example than most asset allocation plans I have seen on this board.  The only reason you think there is uncertainty with my example is that you appearantly think the insurance company is going to go bust.  If it doesn't go bust there is actually more certainty with my example.

This is like many of the other discussions we've had before.  People largely have their minds made up and will concoct the system or set of 'facts' that supports the opinion they've arrived at.

I do believe you have done exactally that.

However, the layers of complexity above are unnecessary.  The insurance companies are taking your money and everyone elses money and investing it long term in stocks, bonds and other investment products.  They're making their payments.  They're making a profit.  Over the broad range of customers, some will die early, some will die late, and some will die right on time.  On balance, they'll pay out less than they make.

I'd like to keep that profit margin for myself.

This paragraph is a good argument for refuting your go bust scenerio above.  The fact that the insurance co gets the house odds from a "when you die aspect" is the other source of income that will help keep it solvent when you go bust in the above discussion.  So basically what you are getting is the assurance of your inflation adjusted income stream even if you live longer than your life expectancy and your down side is it might take most of your portfolio (but then again the odds are it won't).

But like I said, i'm sure there are people that these make a lot of sense for.  Singles with a lack of comfort in investing that feel they can 'make it' on the annuity payment, dont have a long horizon, and have no heirs.  Or someone looking for that extra layer of diversification.

This is not just for singles, people with a lack of comfort in investing, or heirless people.  Granted it may be perfect for them, but based on other posts I have read (including one that I quoted in my last post) it or a variant might be right for other potential ERees and in fact give them the confidence to actually retire sooner.

 

[ladelfina]

Wrangling with my unintelligent asset allocation, I turned again to the "Four Pillars" book.

Suggestions for my alter-ego "Taxable Ted" include 15% REIT inside a Vanguard A-N-N-U-I-T-Y... Hmmm. I gather this is to defer taxes on the income until the money is paid out (after age 59 1/2) but I am not clear on the mechanics/structure of an account like this (and not sure I want to get into something complicated I don't understand).

As of the book's writing, the author mentioned a .39% "insurance expense"  as well as minimum investment, etc.

Anyone have experience with something like this?

Can you "roll your own" annuity made up of anything? That's news to me, but could be interesting for those who are concerned about a middleman eating up profits and commissions.

 

[cute fuzzy bunny]

So it provided more assurance than your own plan.

No it did not. "My" "Plan" (also known as "investing") offered substantially higher income, an excellent prospect of better inflation protection and a likely ability to pass more money to your heirs, with the acceptance of some minor downside market risk that has not materialized during the last 30+ years for the specific fund I mentioned, and in aggregate hasnt been a problem for the term of the entire US stock market since 1871.

Actually maybe not. For example, I was told about one annuity product (a fixed term annuity that guarantees return of principle or 75% of the S&P 500 gain, whichever is greater) that invests in US zero coupons and S&P 500 index options. I have not read here where anyone is investing in S&P 500 index options (however I admit that I have not read every post on this board). Also, in the quantity they buy they probably a better deal on transactions costs. It has professional managers who may be a little smatter than your average individual invester and potentially have access to investments you don't. There is another way the insurance co. makes money that I discuss below.

Insurance companies dont just take YOUR money and invest it and give you the results of YOUR investments.

And if the stuff you are buying goes bust there goes your annual W/D; so what is your point, that the insurance company goes bust with you? Probably less likely than you going bust by yourself.

My point is that the people who tend to prefer annuities are doing so to protect themselves from major market problems like skyrocketing long term inflation and depression type events, and that those events will hurt the insurer as much or more than an individual investor employing good asset allocation. They have buildings to pay rent on, people to pay salaries to, stuff to buy...I just have to pay ME. If you're going to assign risk, please assign it uniformly. Saying one is virtually risk free and the other is risk laden when both face the same macroeconomic downsides almost equally is not a fair comparison.

You may not like CPI as an inflation indicator but that is irrelavant since my example made a comparison to FIRECalc results that uses CPI as its inflation number.

I do not like CPI as my personal inflation indicator, but firecalc isnt why. You indicated that annuities provide an inflation protected "real" income. I pointed out that for many people, this is not necessarily true. If you buy tips or a CPI protected income stream like a CPI adjusted annuity, your personal rate of inflation better equal or be lower than the CPI. For a lot of people, thats not the case.

Appearantly you were not following my example and I can't take any short cuts with my language.

I can! "I have concocted a scenario that i'm comfortable with regarding a use of annuities."

You've unevenly applied risk levels. You're assigning attributes that may not bear out for a lot of people. Your "leftover money" is a red herring. It might not be left over depending on what you invested it in. It might be inflation reduced to the point where its not worth anything. And in my example the annuity product made it unnecessary...both people get paid for life.

I do believe you have done exactally that.

Perhaps. I've looked at the annuity thing a number of times. From a number of annuity providers. From large ones to little ones. Always came back to the same thing: hand over a percentage of possible profit to someone else in exchange for their paying me all my life an amount that wouldnt keep up with my personal rate of inflation and at the end wouldnt leave any money for my kids to inherit.

This is not just for singles, people with a lack of comfort in investing, or heirless people. Granted it may be perfect for them, but based on other posts I have read (including one that I quoted in my last post) it or a variant might be right for other potential ERees and in fact give them the confidence to actually retire sooner.

I dont agree. I've never seen a prospective ER say "I'd be willing to retire sooner if I had a lower but guaranteed income stream". Usually its "I dont think I have enough money or will be able to keep up with my spending rate". Lots of discussion around whether 4% is enough or too low. I dont think too many annuities pay 4% plus an inflation adjustment. If you find one, let me know.

But like i've said a bunch of times, if you think its whats right for you, you oughta do it! I think everyone should run the numbers on any and every investment product and weigh the associated risks and attributes. When they find a good balance of risk and return that apply to the term of their expected retirement, they should buy those products.

Annuities, in my analysis, give up too much potential return in exchange for a perceived safety that I dont think exists for a lot of people.

I imagine taking a CPI adjusted annuity and using it over my 40-50 year retirement period, most of which I imagine will be spent in California where my personal rate of inflation is running at 5-6%+...I'd be feeling pretty stupid when I've hit my 70's and my annuity payment has half the buying power that it did today...

 

[jdw_fire]

CFB, I am happy for you that you are such a good investor that you can get a “substantially higher income”, inflation protection that is much higher than CPI, and “pass more money to your heirs” than the annuity example I provided.  But since my annuity example provides the same income, the same inflation adjustments and a larger residual portfolio than FIRECalc showed for the same inputs (i.e. starting amount of dollars and equivalent time frame for 60yos) you are also beating historical data so you must be extremely talented.  Given your talent level I can see why you think my example is not for you (however if memory serves me you also have an annuity-like income stream supporting you portfolio called a working spouse).

I agree with your statement that “everyone should run the numbers on any and every investment product and weigh the associated risks and attributes.  When they find a good balance of risk and return that apply to the term of their expected retirement, they should buy those products.”