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Old 09-04-2012, 10:06 PM   #21
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No, I am betting inflation won't, on average, go higher. That is why I don't like the thought of buying an annuity at today's rates but I like the thought at higher rates. After all, I can lock in, even with a graduated annuity, a SWR much higher than 4% for that portion of my portfolio.

Marc
Yes, and "locking in" the rate is exactly what you'll be doing.
We've had some remarkably low inflation of late, it's not usually like this. And we have a huge gob of debt that will provide a powerful incentive in future years for the US government to foster inflation (so the debts can be paid off with dollars that are worth less).

There were many 30 year periods in the past when a "locked in" 5% rate wouldn't have worked out very well.
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Old 09-05-2012, 03:09 AM   #22
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I just bought my first deferred annuity this year (as discussed in other threads) but did not take inflation into consideration -the annuity will have a 12% payout when I reach 62.
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If you buy an annuity that's exactly the bet you'll be making--that inflation will stay low.
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Old 09-05-2012, 07:46 AM   #23
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I just bought my first deferred annuity this year (as discussed in other threads) but did not take inflation into consideration -the annuity will have a 12% payout when I reach 62.
This might work out, or you might end up losing money to inflation (because of the way it's calculated and paid out, a direct comparison of an annuity's payout rate and inflation % isn't applicable). But I'm sure you purchased the annuity in order to have a guaranteed income stream, realizing that the income stream might be smaller than what you likely could have achieved through other investments, and that there's no guarantee it will keep pace with inflation. You pay for the guaranteed fixed income, and many people believe doing this is a good choice for their situation.
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Old 09-05-2012, 09:23 AM   #24
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If you buy an annuity that's exactly the bet you'll be making--that inflation will stay low.
Funny thing is that you can't time much - even annuities (specifically an SPIA).

We purchased ours in early-2007 with an IRR rate of just under 5% (no COLA).

Today, more than five years later? We look smart. Really, it was a short term bet on a long term instrument (life SPIA, purchased as "gap insurance" while delaying SS). Any remaining payments after that time are just icing on the cake for the rest of our lives, in our plan.
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Old 09-05-2012, 06:42 PM   #25
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There were many 30 year periods in the past when a "locked in" 5% rate wouldn't have worked out very well.
Yes, and if treasuries go to 8% anytime in the next ten years, this country is going have to renege on so much debt that I won't be worrying that I made a somewhat bad debt on an immediate annuity. No matter inflation, we will not be able to grow our way to sustain 20,000,000,000,000 debt at 8%.

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Old 09-05-2012, 08:33 PM   #26
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I'm still trying to figure out the problem with low inflation. So I'm losing 0.1% to it on my 1% CD instead of losing 2% to it on my 10% CD?

And low-yield Treasuries. Hey, China, want some more?

And, gosh, imagine if the only way to earn a return over inflation was to hold low-volatility dividend stocks for years or even decades...
Maybe it has only been local to me, but I used to have no problem getting CDs that paid significantly higher than inflation. I got a 4 year CD that paid 6% as recently as 2006, and inflation wasn't that high in 2006. Plus high CD rates with relatively high inflation is good for people with high assets in CDs.
Example- a person with 1million in CDs with 6% interest (6% inflation), who spends $40k a year, is still $20k ahead at the end of the year (excluding taxes).
Now take the same person, same scenario except plug in 2% as the variables, the same guy now has only $980,000 instead of 1,000,020. That is why they call it the war on savers. Even accounting for the next year budgets going up 6% and 2% due to inflation, there is still a significant gap in assets between the two scenarios. If I am wrong, someone please correct me!
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Old 09-05-2012, 08:45 PM   #27
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If I am wrong, someone please correct me!
Well, since you asked . . .
In both the 6% and the 2% case, the guy's portfolio is worth exactly the same (has the same buying power) at the end of the year as it did at the start. You can take out any amount you wish for his annual "draw", in neither case is he making (or losing) money.

Except: If the money is in a taxable account all the interest he was paid is subject to tax. Even though he really made zero true gains in either the 2% or the 6% case (because each dollar is worth less than it was due to inflation). Now, is it better to pay tax on $20K or on $60K? Each dollar in the $60K case is only worth 4% less than in the $20K case, but he has to pay about 3 times as much tax.
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Old 09-05-2012, 09:01 PM   #28
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Well, since you asked . . .
In both the 6% and the 2% case, the guy's portfolio is worth exactly the same (has the same buying power) at the end of the year as it did at the start. You can take out any amount you wish for his annual "draw", in neither case is he making (or losing) money.

Except: If the money is in a taxable account all the interest he was paid is subject to tax. Even though he really made zero true gains in either the 2% or the 6% case (because each dollar is worth less than it was due to inflation). Now, is it better to pay tax on $20K or on $60K? Each dollar in the $60K case is only worth 4% less than in the $20K case, but he has to pay about 3 times as much tax.
Thanks, and I am following you, Sam. But maybe its just simpletons like me, but it is way more palatable to see your money grow even if its just relative terms instead of absolute terms. It seems reassuring even if its false that the money grew over a year instead of instead of drawing down.
Concerning inflation rates and CDs. I checked that inflation was 4% in 07, and I got a 6% CD in fall of that year. Assuming inflation is about 1.5% now, I don't see any CDs that pay 3.5%. I guess I have to accept the fact that those days are over. I guess I am more of a complainer than most because I am more of a CD guy than investor. Although I have stepped up my aggressiveness the past few years and have been loading up on I Bonds
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