I'm getting spooked about the markets

[HI Bill]

If the market would crash completely, we'd lose about 50%, since half of our assets are in annuities.

If the market were to crash completely ($0 value), the annuties you hold would also be worth $0, and the firms that hold them would be bankrupt. You'd lose close to 100% of what you have in both equities and annuities.

 

[bw5972]

Since investing in 1986, I never sold due to market downturns. I rode it out. Starting this year we had to take an RMD, which we didn't need. Usually, we can get buy with social security and a pension.Since our saving account was getting bigger and bigger, especially with the RMD, we decided to start investing about 10% of our monthly income into the stock market. IMHO, I think the market has more room for growth. If the market would crash completely, we'd lose about 50%, since half of our assets are in annuities.

By "Crash completely" you are saying to ZERO! Where does this hyperbole come from? I hear people all the time talking about losing ALL their money in the 2008 collapse. This kind of talk drives irrational fear and keeps people from investing at all. Shame on those who allow this to go by without comment.

 

[Archman]

If the market were to crash completely ($0 value), the annuties you hold would also be worth $0, and the firms that hold them would be bankrupt. You'd lose close to 100% of what you have in both equities and annuities.

What if it was just a STOCK market crash?

 

[Archman]

By "Crash completely" you are saying to ZERO! Where does this hyperbole come from? I hear people all the time talking about losing ALL their money in the 2008 collapse. This kind of talk drives irrational fear and keeps people from investing at all. Shame on those who allow this to go by without comment.

I said IF. But, I guess my premise,according to HNL Bill, is wrong. As far as people losing ALL their money, if you had all your money in Lehman Brothers in 2008, you lost it all.

 

[DEC-1982]

It is not uncommon for early retirees to have high WRs before SS and/or pensions start. Ours started high... declined when I started my pension and will decline much further once we start SS. IMO, it is only that ultimate WR that counts.

This is one reason I find the discussion of withdrawal rates to be of little use. I see at different times, one pension kicking in, a second pension starting, one SS income starting, a second SS income starting, before we get to what MIGHT be a steady withdrawal rate. And even then, at some point expenses drop, and then one SS stops. When the first SS income stops, expenses will change again. Withdrawals (and withdrawal rates) will be all over the place during the retirement period.

If you run a FIDO RIP report, you can see the % WR varies significantly over time.

 

[97guns]

Nothing to fear, the plunge protection team will protect you

https://www.investopedia.com/terms/p/plunge-protection-team.asp

Or maybe not....

“Since the financial crisis of 2007 and 2008, many countries overtly rig their stock markets including Japan and China. This type of activity can be effective in the short term, but if equities markets are artificially inflated, the bubble will burst.”

 

[2Moutal]

These are great charts, thanks for sharing.

 

[COcheesehead]

This is one reason I find the discussion of withdrawal rates to be of little use. I see at different times, one pension kicking in, a second pension starting, one SS income starting, a second SS income starting, before we get to what MIGHT be a steady withdrawal rate. And even then, at some point expenses drop, and then one SS stops. When the first SS income stops, expenses will change again. Withdrawals (and withdrawal rates) will be all over the place during the retirement period.

If you run a FIDO RIP report, you can see the % WR varies significantly over time.

So true.

 

[HI Bill]

What if it was just a STOCK market crash?

If it is 'just' a stock market crash, the companies issuing the annuities will be unable to pay their participants because they have your assets invested in the markets. The difference between the profit on your annuity lump sum's yield and what they pay you is their profit (or loss).

Here's what Nationwide, a popular annuity company, has to say about it: "All guarantees and protections are subject to the claims paying ability of the issuing company, but the guarantees do not apply to any variable accounts which involve investment risk and possible loss of principal."

https://www.nationwide.com/annuity-investments.jsp

CORRECTION: Fixed annuties routinely invest in bonds, and therefore, theoretically, might have a lower risk in the event of a market collapse.

 

[Archman]

If it is 'just' a stock market crash, the companies issuing the annuities will be unable to pay their participants because they have your assets invested in the markets. The difference between the profit on your annuity lump sum's yield and what they pay you is their profit (or loss).

Here's what Nationwide, a popular annuity company, has to say about it: "All guarantees and protections are subject to the claims paying ability of the issuing company, but the guarantees do not apply to any variable accounts which involve investment risk and possible loss of principal."

https://www.nationwide.com/annuity-investments.jsp

According to the Nationwide site: "A fixed indexed annuity is not a stock market investment and does not directly participate in any stock or equity investment."

Our annuity is a fixed index one.

 

[HI Bill]

According to the Nationwide site: "A fixed indexed annuity is not a stock market investment and does not directly participate in any stock or equity investment."

Our annuity is a fixed index one.

Thank you for the correction. So, I assume it's invested in bonds? And that they cannot lose value in the event of a stock market crash?

 

[ncbill]

Indexed to what, stocks, bonds, TIPS?

 

[copyright1997reloaded]

According to the Nationwide site: "A fixed indexed annuity is not a stock market investment and does not directly participate in any stock or equity investment."

Our annuity is a fixed index one.

If the stock market would to crash "completely" (from your original quote), many many other assets would be under extreme duress with institutions failing, loans defaulting, and so on. The truth of the matter was that there were not a lot of safe havens after the crash of 29, when peak to tough equities lost 90% of their value.

ETA: The probability of your 'fixed' annuities being impacted in an event like the repeat of the great depression is a lot higher than what you might think it is.

 

[pb4uski]

Thank you for the correction. So, I assume it's invested in bonds? And that they cannot lose value in the event of a stock market crash?

Not true, during the great recession corporate bonds took a significant hit. Most of the assets backing fixed rate annuities would be full faith and credit and investment grade corporate bonds. But simply a decline in value would not be an issue as long as they continued to perform (pay interest and principal at maturity).

The bigger problem in such a dire circumstance might be the proverbial run on the bank if there was a big spike in surrenders.... but IIRC the insurer has the contractual right to delay paying surrenders for a brief period of time under such dire circumstances. Just going from memory.... but it would have to be a really bad event for insurers to suspend surrenders.
To the best of my recollection there were no defaults or suspensions of annuity payments in the 2008/2009 recession and, in fact, insurers weathered that bad storm quite well... certainly much better than the banks.

And before someone brings up AIG, there issues had nothing to do with their insurance operations... in fact, the sale of some of their insurance operations was what eventually saved them.

 

[Archman]

Thank you for the correction. So, I assume it's invested in bonds? And that they cannot lose value in the event of a stock market crash?

I'll have to see what they're invested in. However, in a stock market crash, I would lose nothing.

 

[Archman]

Indexed to what, stocks, bonds, TIPS?

S&P index

 

[OldShooter]

S&P index

The ones I have seen are indexed to the nominal S&P not the total return of the S&P. So if its market quote is up 10% in a year that is what the annuitant sees. (Unless 10% is over the cap.) The insurance company keeps the dividends which IIRC run about 4%.

 

[Archman]

Thank you for the correction. So, I assume it's invested in bonds? And that they cannot lose value in the event of a stock market crash?

The insurance company invests in bonds and equities. The annuity owner does not invest in the index, the company does. The annuity owner does not bear any market risk; the company does.

 

[copyright1997reloaded]

The ones I have seen are indexed to the nominal S&P not the total return of the S&P. So if its market quote is up 10% in a year that is what the annuitant sees. (Unless 10% is over the cap.) The insurance company keeps the dividends which IIRC run about 4%.

The insurance company likely isn't invested in the SP 500, but instead in other types of investments (e.g. real estate). Also, the current dividend yield on the SP500 is about 1.81% (as of July 2018). I would imagine that they also using hedging strategies (for example long dated calls) so that they can limit their upside risk. For example, while they might be invested in real estate, they could also have long dated SP500 calls in case we have a market 'melt up' event.

 

[RockDoctor]

I get page not found on both your links?

Looks like early-retirement.org prefaces the link with its own URL. Just edit the address, eliminating the http://www.early-retirement.org/ prefix.The actual URLs are
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html and
http://www.stern.nyu.edu/~adamodar/pc/datasets/histretSP.xls

 

[capjak]

The ones I have seen are indexed to the nominal S&P not the total return of the S&P. So if its market quote is up 10% in a year that is what the annuitant sees. (Unless 10% is over the cap.) The insurance company keeps the dividends which IIRC run about 4%.

I do not believe the insurance company keeps the dividends as they do not invest the funds directly in the S&P stocks. They invest in long term bonds along with call options, since they do not own the actual stock they do not get dividends either. They make money off the spread between the %interest they provide to the annuity owner (usually at or a little above their bond portfolio) vs how much profit they get from the options. If the index goes down they lose the cost of the index options as they expire.

At least this is my understanding from reading several blogs/books etc...

 

[Gearhead Jim]

My feelings and intuition have predicted 9 out of the last 4 recessions, so I just go with a gradually declining equity allocation as we get older.


About half of our current retirement income comes from a pretty secure pension and SS.
The other half comes from a 50-50 mix of stocks and CD's. So if the stock market declines by 50%, we would lose only 12.5% of our income.
I think many people are in a similar situation and would weather a market downturn better than you might expect.

 

[OldShooter]

I do not believe the insurance company keeps the dividends as they do not invest the funds directly in the S&P stocks. They invest in long term bonds along with call options, since they do not own the actual stock they do not get dividends either. They make money off the spread between the %interest they provide to the annuity owner (usually at or a little above their bond portfolio) vs how much profit they get from the options. If the index goes down they lose the cost of the index options as they expire.

At least this is my understanding from reading several blogs/books etc...

Sorry to not be clear. My point was that the customer is being mislead because his gains are based on only part of the S&P's gains, not on total return. What the insurance company actually owns is completely irrelevant.

 

[VanWinkle]

My feelings and intuition have predicted 9 out of the last 4 recessions, so I just go with a gradually declining equity allocation as we get older.


About half of our current retirement income comes from a pretty secure pension and SS.
The other half comes from a 50-50 mix of stocks and CD's. So if the stock market declines by 50%, we would lose only 12.5% of our income.
I think many people are in a similar situation and would weather a market downturn better than you might expect.

I like the way you look at this Jim, makes perfect sense to me!!

VW

 

[Retire2013]

If, after running all the calculations/analyses and it looks like you have enough to retire, then IMHO, you should retire ASAP. It's awesome having so much more free time to do whatever you want to. Before I ER'd, I was a little "spooked" too but I got over that psychological hurdle two years into my ER. Especially in your case since you mentioned that you can always do some consulting if you should need a little extra money in your retirement.

I have just lost a friend this week to cancer. He retired just around 2 years ago. Played golf at least once a week and took his dogs to the dog park several days a week.

When you're still in good health and have the financial wherewithal to retire, "JUST DO IT!" There's so much to do. Time is running out. Just retire, there's my 2 cents!