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So you've saved enough: big deal. How will you spend it?
Old 06-14-2007, 08:25 PM   #1
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So you've saved enough: big deal. How will you spend it?

"You've Worked Hard, Saved, and Just Retired: How Do You Manage Your Finances Now?"

I only read about one out of every 50 Knowledge@Wharton articles these days, but this one stood out. The authors claim that 33%-50% of all retirees return to work in one form or another, and the authors also profess to be baffled that annuities aren't as popular among retirees as they should be. (Hmmm... I wonder who's funding Wharton's endowments.) The implication is that retirees are either woefully uninformed or incapable of evaluating the math, and it's Wharton's job to rescue us from ourselves!

Bill Sharpe also espouses a "lockbox" system with money invested specifically for certain ages that a retiree can spend when they reach that age and not before. He says he wants to be able to use it when he's "drooling" and senile...
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Old 06-14-2007, 08:37 PM   #2
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I love this part:

Brown cited several explanations for the slow take-up of current annuity products, including:
  • Public perception of high prices;
  • A desire to pass savings along to heirs;
  • Consumers' need for liquidity to hedge against medical expenditure shocks;
  • Retirees' tendency to defer thinking about death;
  • Reliance on Social Security benefits;
  • The lack of inflation protection in most existing products.
"But the puzzle remains," said Brown. "At the end of the day, this research still doesn't explain why retirees are slow to annuitize."


Hmmm.... Enough explanation for me.
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Old 06-14-2007, 09:56 PM   #3
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"In another study, we were mystified at peoples subconscious desire to throw away pinless grenades and the equally inexplicable lack of interest in drinking drain cleaner..."

Lets give them credit though...they neatly summarized the reasons to avoid the product, they just had the polarity in reverse.
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Old 06-14-2007, 10:33 PM   #4
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The thing is that these articles are not aimed at us. They are aimed at the majority who have no clue about finances. If they get a 3% response rate, their article has been a success.

OTOH maybe we could get Nords, the ER star, and CFB the real estate mogul, KC the independently wealthy retired CEO, and a few others like REW, and mount a newsletter to attract some easy subscription revenues?

Strategies for Retiring Early to Enjoy Your Life.
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Old 06-15-2007, 02:46 AM   #5
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ill spend 90% of it on wild women and beer, the other 10% ill waste
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Old 06-15-2007, 04:14 AM   #6
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"You've Worked Hard, Saved, and Just Retired: How Do You Manage Your Finances Now?"

...
Bill Sharpe also espouses a "lockbox" system with money invested specifically for certain ages that a retiree can spend when they reach that age and not before.

That sounds similar to the approach I was talking about a few months ago.

http://www.early-retirement.org/foru...ent-26364.html

It makes sense to me if you want to put a portfolio firewall in place to try to not rob the funding from the next stage of life. I chose 10 year periods. Since that post, I have refined the idea a little. I am still toying with it. Not sure if I will use it or not. But it is good to see that there is other validation of the proposed approach.

It seems to me that the common sense part of this approach is that it is easier to manage to a budget for a 10 year period than for 40. It forces one to govern down spending earlier if they are getting in trouble. There is nothing that says one cannot tap into the later fund early if something catastrophic occurs.


On the annuity item... Most people think they can beat the outcome. That is the common sense answer.

Sorry--- I am on my soapbox now

For the majority of the public... I am convinced that many would be better off purchasing an annuity with some portion of their assets to create a basic income floor.

Fact: Most people (the absolute majority) do not know how to deal with this complex problem because they either can't or won't spend the time to educate themselves. This was the subject of a Frontline documentary awhile back... people do not know how to manage the income side of the money. Others are frozen with fear.

Another Fact: Many (most) who think they know how to deal with the stock and bond market only fool themselves. There is even a smaller percentage that have a solid understanding and a plan (form managing the income and expense) side of retirement! Heck for that matter, even with a financial planner... most of so called financial planners are sales people (insurance) out for a commission. Most of those do not have a clue about comprehensive planning! Any one individual that actually thinks their plan is cut and dried is a fool (experiencing hubris)! We are trying to manage a pension plan without the benefit of the pooling of money from many people with different retirement time horizons (spread out the drawn down)... It is very difficult and complicated! The only thing we have semi-control over is our spending. The market has control of your assets. And it is very unforgiving.


With an understanding and a plan, you are taking a measure/balanced risk.

Without understanding and a plan, you are just taking a risk.
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Old 06-15-2007, 04:32 AM   #7
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dont forget to add shunning any investment with an expense charge higher than an index fund. many excellent investments are passed up because of charges they may have. as discussed earlier my un-listed reit paid 7 to 8-1/2% interest the last 7 years. i was getting 7% when money markets and bonds were less than 1% to 2%. all i had to do was give up a 1% a year buy in price , which by the way is very cheap because you cant buy any real brick and mortar real estate without closing costs.

and i agree with some types of annuties, they too are shunned and everyone thinks they can get the same level of return on their own but we can't . the insurance companies have something we cant duplicate. A BIG PILE OF DEAD PEOPLE. and thats what allows them to pay out those higer rates on immeadiate annuities.

i myself are looking into a fixed annuity with a guaranteed floor and an index linked annuity with a principal guarantee so as to be able to increase the return on my income bucket with very little risk.
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Old 06-15-2007, 06:31 AM   #8
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Quote:
Originally Posted by kcowan View Post

OTOH maybe we could get Nords, the ER star, and CFB the real estate mogul, KC the independently wealthy retired CEO, and a few others like REW, and mount a newsletter to attract some easy subscription revenues?

Strategies for Retiring Early to Enjoy Your Life.
Hey, that's a great idea, but leave me out. Sounds like w*rk.
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Old 06-15-2007, 08:10 AM   #9
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I'm just impressed that selling my primary residence a few times qualifies me for mogul status.
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Old 06-15-2007, 10:20 AM   #10
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and i agree with some types of annuities, they too are shunned and everyone thinks they can get the same level of return on their own but we can't . the insurance companies have something we cant duplicate. A BIG PILE OF DEAD PEOPLE. and thats what allows them to pay out those higer rates on immediate annuities.
This has always puzzled me - if not for the greed factor, shouldn't an annuity be like any insurance policy where the risk is spread and each participants costs lowered due to those that don't collect the full amount (i.e. die early)? This spreading of risk is basically how defined pensions operate, no?
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Old 06-15-2007, 10:29 AM   #11
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This has always puzzled me - if not for the greed factor, shouldn't an annuity be like any insurance policy where the risk is spread and each participants costs lowered due to those that don't collect the full amount (i.e. die early)?
I think the rates reflect the mortality experience, so in effect the risk is spread out.

I've come to accept the importance of watching your back for those older years, and an annuity concept is sensible. I say "concept" because I think you can do it without an insurance company, get better returns, and perhaps similar risk by self-annuitizing in a moderate to conservative bond level investment.

While this entails some tiny principle risk and some tiny volatility, time will smooth that out. And commercial annuities are not risk free, either.

The increased payouts with increasing age are quite striking so I might well reconsider a commercial option when I'm older. I'd spread the total amount over 2 or 3 companies to spread the risk, and confine it to a relatively small fraction of my nest egg.

But at age 58 a SPIA makes no sense to me. I'd rather invest the money.
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Old 06-15-2007, 10:50 AM   #12
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I've come to accept the importance of watching your back for those older years, and an annuity concept is sensible.
It amazes me that journalists will recommend annuitizing a portion of a portfolio and then, in the same breath, castigate the survivability of Social Security. Somehow AIG & Vanguard are deemed more capable of honoring their commitments than a government.

It's good to have an annuity in one's 70s, 80s, and later. I'm just not convinced that there needs to be more of an annuity than SS.

-- Nords, whose military pension is arguably one of the biggest annuities around.
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Old 06-15-2007, 11:30 AM   #13
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I wasn't clear - my question is one more of a philosophical one. If annuities allow spreading the risk of dying broke, shouldn't they be more efficient than everyone trying to "self insure" by setting aside huge amounts of money?

What is unclear to me is why this product has been so rife with overcharges, where as other similar products, i.e. car / home / life insurance seem to operate in a relatively competitive market.
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Old 06-15-2007, 12:08 PM   #14
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I wasn't clear - my question is one more of a philosophical one. If annuities allow spreading the risk of dying broke, shouldn't they be more efficient than everyone trying to "self insure" by setting aside huge amounts of money?
They would be except for the dual issues of profits for the insurance company and that they get to keep all of your principal when you die.

I'd rather pocket the profit, risk a very slim chance that over 40 years they might do better with investing the money than I will, and if I happen to need that quarter/half/whole million at some point in my old age...I still have it to spend.

And I can bequeath whatevers left to someone or some charity. I suppose if you've lived a life where theres nobody on the planet you'd like to see have your money more than MasterMutualAlliedInsuranceCo...it was a sad life...

Quote:
It amazes me that journalists will recommend annuitizing a portion of a portfolio and then, in the same breath, castigate the survivability of Social Security. Somehow AIG & Vanguard are deemed more capable of honoring their commitments than a government.
On the other hand, AIG/Vanguard isnt printing on their statements that they may not pay you 40 years hence, while SS is. Not much of a concern if you're 60 or 70. A little bit noteworthy when you're under 50.
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Old 06-15-2007, 12:38 PM   #15
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I wasn't clear - my question is one more of a philosophical one. If annuities allow spreading the risk of dying broke, shouldn't they be more efficient than everyone trying to "self insure" by setting aside huge amounts of money?

What is unclear to me is why this product has been so rife with overcharges, where as other similar products, i.e. car / home / life insurance seem to operate in a relatively competitive market.
Actually, the market for SPIAs is pretty fiercely competitive, with some companies arguably doing stupid things in this market for the sake of volume/sales growth.

But you have to remember the constarints that insurers live under:

- They have to hold a chunk of capital against the annuity, typically in the ballpark of 7% for the lower grade guys and upwards of 10% for taht strongest ones.
- They have to live with a large amount of regulatory scrutiny and pay for a lot of costly overhead. Ever seen the headquarters buildings of the big name insurers?
- They have to live with significant investment constraints. Typical portfolio is roughly 40% AAA-A rated bonds, 50% BBB bonds, and 10% junk and non-bond assets. Would you invest in 90+% bonds?
- They have to make a profit over and above what they pay you plus the overhead.

If you keep the money and avoid all of the disadvantages insurers start out with, its not that hard to come out ahead of buying a SPIA.
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Old 06-15-2007, 12:42 PM   #16
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I used to sell networking stuff to insurance companies in the northeast, where many are headquartered...particularly in Conn.

A sample exchange:

"We'd like to wire the entire building with fiber optic cable instead of copper"

"Sure...but you do know that'll be about 10x the cost and you arent really going to see any upside benefit?" (this was around 1987 or so)

"Oh we dont care, we just want the best."

You sure you cant manage and spend your money a little better than that
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Old 06-15-2007, 06:32 PM   #17
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I'm just impressed that selling my primary residence a few times qualifies me for mogul status.
Remember that the former real estate mogul was JG.

Ha
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Old 06-15-2007, 06:52 PM   #18
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Yeah, but we all KNEW JG was full of crap.

You wanna see the satellite shot of his dog house on the flood plain again?
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Old 06-15-2007, 08:15 PM   #19
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CFB, I must have missed the picture of JG's house. I could use a laugh, shoot it over again.

Thanks
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Old 06-15-2007, 08:19 PM   #20
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CFB, I must have missed the picture of JG's house. I could use a laugh, shoot it over again.
Ruh-roh, another real-estate mogul on the prowl for a bargain...
... or was that "titan of industry"?
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