FYI: Ben Stein's views on asset allocation.

[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]

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  

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.

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.

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.

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]

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]

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.

 

[Ed_The_Gypsy]

Ladelfina wrote:

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

Anyone have experience with something like this?

Ladelfina,

Annuities, by legal definition, must have an insurance component. Vanguard makes it as small as they can get away with. Inivestment minimums could also be a legal point--or just the smallest parcel that the vendor can hope to make money selling.

Cheers,

Ed

 

[Ed_The_Gypsy]

An odd development:

Yesterday, all of Ben Stein's 2006 Yahoo columns disappeared. His archived 2005 columns remain.

Now all ya got is Robert Kiyosaki.

Ed The Gypsy,
who lost 5% on paper this week. And is STILL 100% invested in equities.
Ridin' the waves.

 

[ladelfina]

Thanks ats5g and Ed. Sounds like this could be an interesting alternative without the issues of huckster salesmen and high commissions.. Am I wrong in imagining that Vanguard would have better survival odds than any given random insurer's annuity scheme?

Ed, I'm ready to pop some Dramamine...

 

[cute fuzzy bunny]

Take a look at Bernstein's A Limited Case for Variable Annuities.

Good article, although you have to make a lot of adjustments to the numbers as its an old article. As of this articles writing, capital gains were taxed at 20%, junk bonds were pulling in over 12%, and reits were also returning quite a bit more than they do today (recent capital appreciation aside).

Even with those figures, he was barely able to make a case for annuities, only for certain asset classes (due to their tax inefficiency if held in a taxable account), and only with the returns and taxation that occurred at the time. Even at that, there was a 43 year period before the annuity became a "better deal" than self investing.

With 15% capital gains, 7% junk and sub 5% reit yields, if you rerun his calculations, the "limited case" becomes very limited.

 

[Ed_The_Gypsy]

Am I wrong in imagining that Vanguard would have better survival odds than any given random insurer's annuity scheme?

ladelfina,

I don't know how Vanguard is putting these together, but my first guess is the same as yours. Worth a phone call, at least.

My wife is a victim veteran of the Baldwin United bankruptcy. I imagine Vanguard would be a better risk than the average 'random insurer's annuity scheme'. But, DO YOUR HOMEWORK!

By the way, I posted a note on Ben Stein's take on annuities in another thread and now I am thinking that you could make your own annuity in a way by buying a fund of some kind and asking Vanguard to pay you so much a month, or just the dividends, from it. You ought to do better than an annuity and have something left for the kids in the end.

Ed

 

[mathjak107]

psssst i have an investment deal for ya........
how about you give me 100,000 dollars ,ill give you a 7% return ..for the next 14 years ill give you back your money a piece every year..total return on your money zero
if you live longer than 14 years ill give you some of the interest i earned with your money ....total return on your 100,000 so far .62%...if you make it to year 16 we are up to 1.62% return....oh yeah and ill give you your choice if you die,,,ill give you back a little less each month and give your spouse 1/2 the amount or ill give you back more of your own money and keep it all....sound like a deal?
OOOPS I THINK I INVENTED THE FIXED ANNUITY