FYI: Ben Stein's views on asset allocation.

[Rich_in_Tampa]

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]

Originally Posted by Cute Fuzzy Bunny

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 Principal is liquid and can be withdrawn at any time.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.

Originally Posted by Cute Fuzzy Bunny

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.*

Originally Posted by Cute Fuzzy Bunny

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.

Originally Posted by Cute Fuzzy Bunny

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]

Originally Posted by jdw_fire

"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]

Originally Posted by Cute Fuzzy Bunny

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.

Originally Posted by Cute Fuzzy Bunny

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.

Originally Posted by Cute Fuzzy Bunny

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.

Originally Posted by Cute Fuzzy Bunny

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.

Originally Posted by Cute Fuzzy Bunny

* 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.

Originally Posted by Cute Fuzzy Bunny

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.

Originally Posted by Cute Fuzzy Bunny

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).

Originally Posted by Cute Fuzzy Bunny

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]

Originally Posted by jdw_fire

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.”

[cute fuzzy bunny]

jdw, all I can say is that we'll have to agree to disagree.

Your examples, in analysis, dont appear to do the things you say they do. At least not for a lot of investors...maybe most of them. It does do some of the things you say, somewhat, for a very specific set of people. Folks over 60, whose personal rate of inflation is < CPI, etc.

It appears to me that ANYONE can get more money out every year, better appreciation of principal than CPI, and on average, a higher terminal portfolio by simply investing in a 30-40% stock, 60-70% bond mutual fund or one of the 'target retirement' type lifecycle funds. With, I think, better safety than your scenario.

And I dont need to be a "super investor", I just need to pick any one of a half dozen well proven options and stick with it.

Your setup has some serious problems if one of the spouses dies early and/or the investments chosen for that third "safety valve" bucket dont do well. Picking an annuity with survivorship to solve one of those problems simply lowers the payout to a level where it may not be viable anymore.

As far as the digs on the working spouse, she works two days a week and that pays our health care and funds a 403b and our Roths. Certainly a useful function, but hardly the linchpin or even a primary safety valve. In a pinch, we could live off of that income, and it is a safety net. Not one that we need however. She's got the opening to quit anytime she wants and it really wouldnt make a big difference.

If she WERE to quit working, it'd change my investment mix...we'd go from our current high equity portfolio back to the Wellesley/Wellington combination I used to have, or to one of the nearer term target retirement funds.

[jdw_fire]

Originally Posted by jdw_fire

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.”

We do agree on something**

Originally Posted by Cute Fuzzy Bunny

Your examples, in analysis, dont appear to do the things you say they do.* At least not for a lot of investors...maybe most of them.* It does do some of the things you say, somewhat, for a very specific set of people.* Folks over 60, whose personal rate of inflation is < CPI, etc.

My example does exactly what I said it does and I gave you the numbers to prove it, something I must say you did not.* You only give "don't appear"s and "I think"s to back your argument.

Originally Posted by Cute Fuzzy Bunny

It appears to me that ANYONE can get more money out every year, better appreciation of principal than CPI, and on average, a higher terminal portfolio by simply investing in a 30-40% stock, 60-70% bond mutual fund or one of the 'target retirement' type lifecycle funds.* With, I think, better safety than your scenario.

Well I ran the FIRECalc part of my example w/ a 50/50 allocation and again the annuity plan in the example beat it.* So do you not think FIRECalc is correct either.

Originally Posted by Cute Fuzzy Bunny

Your setup has some serious problems if one of the spouses dies early and/or the investments chosen for that third "safety valve" bucket dont do well. Picking an annuity with survivorship to solve one of those problems simply lowers the payout to a level where it may not be viable anymore.

I addressed what happens if one of the spouses die early in a previous post.* As for the "safety valve" as you call it, if you were to implement my example when you turned 60 (I know, I know you won't) the "safety valve" can be invested just as you would if didn't implement my example and therefore be just as safe as your portfolio.

Originally Posted by Cute Fuzzy Bunny

As far as the digs on the working spouse,

There was no dig on your working spouse, just an observation (which you have since confirmed) that you have an annuity-like (my words) safety net (your words).


Finally, I never said this was for everyone and it is obviously not for you.* I was just trying to provide another possibility to the retire wantta bees for their consideration.* *

[ats5g]

Originally Posted by 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.

Take a look at Bernstein's A Limited Case for Variable Annuities. Check out Vanguard Variable Annuity - REIT Index Portfolio. Read that prospectus, especially for more info on withdrawal restrictions, etc.

I don't believe that you can "roll your own" annuity. You have to choose from the options the annuity provider has.

- Alec

[cute fuzzy bunny]

Originally Posted by jdw_fire

My example does exactly what I said it does and I gave you the numbers to prove it, something I must say you did not. You only give "don't appear"s and "I think"s to back your argument.

You apparently didnt read a thing I said.

Good luck with your strategy.