my lifetime average withdrawals numbers

[obgyn65]

There have been a few discussions here about the pros and cons of annuities so I won't discuss these again. However, on the plane back to the US last week I was playing with my FIRE spreadsheet. I calculated my average annual withdrawals with and without the use of deferred annuities early in life and the use of SPIAs later in life.

The average annual withdrawal is about $100,000-$135,000 if I use deferred annuities early (say about $15k only invested each year from age 47 to 55) and using SPIAs at much later age (say $50k SPIAs bought every 5 to 10 years from 70 years old). If I don't use this "annuity mix" approach, the average annual withdrawal will be about $85,000-$95,000.

Has anyone else tried similar calculations ? Am I missing something ?

 

[Animorph]

I can see SPIA's purchased late looking pretty good because of mortality credits, zero final value, and guaranteed lifetime income.

I would think deferred annuities would look worse due to years of no income and bond-like investment gains. As a 100% equities investor, I would like to avoid that.

My other big concern would be inflation. There is no way to adjust your investment in a deferred (or SPIA) annuity without a COLA.

So your numbers will depend on your assumptions and your remaining portfolio AA. Dr. Pfau has shown that annuities can be a preferred bond replacement, though I don't remember the specifics. I believe we had a thread on that.

 

[REWahoo]

Am I missing something ?

The impact of inflation. With 3% annual inflation, your example of a $100,000 withdrawal today will equal only $40,000 in 30 years, less than $30,000 in 40 years.

And if you delay until 70 (23 years from now) that same 3% inflation would erode the value of those $50,000 SPIA's to $25,000, cutting your income from them by half.

Not a financial future I would knowingly choose.

 

[obgyn65]

Thank you. What would you recommend then?

Not a financial future I would knowingly choose.

 

[REWahoo]

Thank you. What would you recommend then?

Something you've indicated you have no interest in - a conservative mix of stocks and bonds available through low-cost mutual funds from companies like Vanguard and Fidelity.

Not saying you should totally abandon your infatuation with annuities, just realize they will not hold up against the inevitable erosion caused by inflation.

 

[obgyn65]

I am not infatuated with annuities. In fact I did not know what they were before I joined this website. I am only trying to optimize my annual cash flow.

Something you've indicated you have no interest in - a conservative mix of stocks and bonds available through low-cost mutual funds from companies like Vanguard and Fidelity.

Not saying you should totally abandon your infatuation with annuities, just realize they will not hold up against the inevitable erosion caused by inflation.

 

[brewer12345]

obgyn, thee is actually a growing body of academic research supporting an allocation to payout annuities to boost withdrawals. The problem for you is that the research is all based on situations where the annuities are paired with a traditional stock and bond portfolio, not all CDs and bonds as you are invested in. You face very substantial inflation risk (how do you think the US will deal with its huge debt of low-coupon treasuries in coming years?). I think this is your number one risk, and you should spend your limited free time for investing figuring out what you can do to mitigate this risk.

 

[LakeTravis]

........ a conservative mix of stocks and bonds available through low-cost mutual funds from companies like Vanguard and Fidelity.

Not saying you should totally abandon your infatuation with annuities, just realize they will not hold up against the inevitable erosion caused by inflation.

It was a pretty easy decision for me - I looked at 70+ years of performance for funds like Vanguard Wellington and although past results are not indicative of future performance, I sure liked what I saw especially when returns were plotted up against highly inflationary periods.

 

[obgyn65]

Thank you. I think I will have to spend a bit less for a year or two at the beginning of my FIRE, which will allow me to reduce the inflation risk for many years to come.

obgyn, thee is actually a growing body of academic research supporting an allocation to payout annuities to boost withdrawals. The problem for you is that the research is all based on situations where the annuities are paired with a traditional stock and bond portfolio, not all CDs and bonds as you are invested in. You face very substantial inflation risk (how do you think the US will deal with its huge debt of low-coupon treasuries in coming years?). I think this is your number one risk, and you should spend your limited free time for investing figuring out what you can do to mitigate this risk.

 

[brewer12345]

Thank you. I think I will have to spend a bit less for a year or two at the beginning of my FIRE, which will allow me to reduce the inflation risk for many years to come.

Perhaps. But inflationary cycles tend to last for several years at a time and can be very damaging to retirees. I think it would be instructive for you to look at what happened to anyone who retired in 1966 with an all-bond portfolio.