The 7 Most Important Equations for your Retirement (book)

[youbet]

Of course the ultimate conservative approach of an annuity actually involves spending principal to buy a guarantee

Today must be my day to fret about the impact of modest long term inflation....... When I read this it reminds me that non-cola'd annuities offer no guarantee whatsoever, at least in terms of providing purchasing power over time. In a decade or two, depending on inflation levels, the non-cola'd annuity payout will likely no longer buy even half of the goods and services it bought at the beginning. If we repeat the inflation of the 70's, even just a single decade will do the annuity in.

An annuity, such as an SPIA, can certainly be very useful in solving certain retirement funding dilemmas. But "guaranteeing" today's purchasing power of some amount of money into the future isn't a guarantee a non-cola'd annunity offers.

 

[nun]

With that plan, the real value of your portfolio will be shrinking over time. You need to add to your portfolio from current income and earnings to make up for inflation. Otherwise, after 2 or 3 decades of typical inflation, you won't have much left in real terms.

Preserving principal in real terms will be a bit more challenging than in nominal terms. But since maintaining the value in nominal terms isn't preserving the principal at all, keeping up in real terms might be a worthwhile goal, at least early on.

Agreed, inflation will be eating away at the value of the principal. I did mention that while spending less than your income is a good principle it does not tell you anything about how much less you should actually spend. With a 2% withdrawal rate you might keep up with inflation if you had a 5% return. My goal is to do that between ER and 65 and the to get all my income after 65 from rent, US and UK SS and a small pension. I'll do some ROTH rollovers while I'm spending that 2% from my taxable accounts, but RMDs will be an issue.

 

[nun]

Today must be my day to fret about the impact of modest long term inflation....... When I read this it reminds me that non-cola'd annuities offer no guarantee whatsoever, at least in terms of providing purchasing power over time. In a decade or two, depending on inflation levels, the non-cola'd annuity payout will likely no longer buy even half of the goods and services it bought at the beginning. If we repeat the inflation of the 70's, even just a single decade will do the annuity in.

An annuity, such as an SPIA, can certainly be very useful in solving certain retirement funding dilemmas. But "guaranteeing" today's purchasing power of some amount of money into the future isn't a guarantee a non-cola'd annunity offers.

Yes if you buy an annuity that does not raise with inflation you spending power will be eroded. I was referring to guaranteed income, not spending power.

 

[youbet]

Agreed, inflation will be eating away at the value of the principal. I did mention that while spending less than your income is a good principle it does not tell you anything about how much less you should actually spend. With a 2% withdrawal rate you might keep up with inflation if you had a 5% return. My goal to do that between ER and 65 and the to get all my income after 65 from rent, US and UK SS and a small pension.

Yes.

And please note that my comments were not at all meant to critique your particular plan being executed under your particular personal circumstances. Rather, I've been somewhat concerned over posts from many of our members talking about preservation of principal, non-cola'd annuities, non-cola'd pensions, etc., that do not account for even tame inflation levels.

For folks retiring early and expecting to fund a 40 year retirement, strong consideration has to be given as to what part of your strategy will take care of inflation.

 

[youbet]

Yes if you buy an annuity that does not raise with inflation you spending power will be eroded. I was referring to guaranteed income, not spending power.

That's the kind of terminology that concerns me. Obviously nun, you "get it." But sometimes I'm concerned about folks who might understand "guaranteed income" as meaning "guaranteed buying power."

In fact, a "conservative" strategy of taking 50% of one's portfolio and buying a non-cola'd SPIA and putting the other 50% in long term government bonds might sound conservative but seems very risky to me. Just an example.

Again, I understand you "get it." My comments were meant only to point out the "guaranteed income" vs. "guaranteed buying power" and "preserving principal" vs "preserving real principal" issues.

Sounds like you have your act together!

 

[nun]

Yes.

And please note that my comments were not at all meant to critique your particular plan being executed under your particular personal circumstances. Rather, I've been somewhat concerned over posts from many of our members talking about preservation of principal, non-cola'd annuities, non-cola'd pensions, etc., that do not account for even tame inflation levels.

For folks retiring early and expecting to fund a 40 year retirement, strong consideration has to be given as to what part of your strategy will take care of inflation.

Yes, the 4% SWR for portfolios has inflation baked into it, and most people will get some inflation protection through SS, but if they put most of their money into non-cola'd income products that provide good income early in retirement the value will be severely eroded by 30 years of 3% inflation. Of course there is the saving grace that income requirements shrink after 70, but I wouldn't build that into my plan........I have my spending growing with inflation until I hear the trumpets.

 

[nun]

Again, I understand you "get it." My comments were meant only to point out the "guaranteed income" vs. "guaranteed buying power" and "preserving principal" vs "preserving real principal" issues.

Sometimes it's easy to forget that everyone isn't an ER geek and I agree that it's important to be precise with language so that people understand the implications of various income choices. I will probably bias my AA more towards equities as I approach 65 and my cola'd income streams begin which is the reverse of conventional logic.

 

[Focus]

I've been somewhat concerned over posts from many of our members talking about preservation of principal, non-cola'd annuities, non-cola'd pensions, etc., that do not account for even tame inflation levels.

I worry about this too -- yet, I keep seeing calculations that show putting a portion into annuities substantially increases the chances of success. As Walter Updegrave says in this CNNMoney article:

Splitting savings fifty-fifty between an immediate annuity and a diversified portfolio can provide the same 4% inflation-adjusted income as in Strategy 1 [50% stocks / 50% bonds, 77% chance of success] -- but with a 99% chance of lasting 30 years.

However, not sure how much today's less favorable annuity rates would alter this result (the article is from 2009).

On the optimistic side, perhaps we overstate the impact of inflation, as discussed in this previous thread:

Inflation, shminflation

But I don't support a switch to "chained CPI" by the federal government. That removes the needed wiggle room for a less-than-best-case scenario.

 

[Midpack]

Turned out to be an interesting read, but it's really not a retirement how-to book. I most enjoyed the Kolmogorov chapter (7) and the annuity table in chapter 3.

|Take It as a Lump Sum|Select a Life Annuity 1) Overall|You can invest the money|Plan sponsor manages flexibility|any way you want, and|the money, but sends |spend more or less money|you a fixed monthly |over time.|check, like a salary. 2)Guarantees|Unless you buy some|Income for the rest of you and promises|protection, you are at the|and your spouse’s life |mercy of the market.|that can’t be outlived. ||A form of insurance. 3) Legacy value|Funds can be bequeathed|Possibly reduced income |or transferred, and are|for spouse upon death, |part of the retiree’s estate.|nothing left for the next ||generation. 4) Decision|You must manage the|Once the initial decision complexity|money for the rest of|is made, no further deci- |your life, or delegate the|sions are required. Low |responsibility.|complexity. 5) Inflation|Depends on how you|Some employers provide protection|invest the money, and the|income adjusted annu- |type of investments you|ally for inflation, but most |select.|do not. 6) Credit safety|Assuming the money is|You are at the mercy of |invested in conventional|the pension plan spon- |funds, there is no great|sor, and their ultimate |risk.|guarantor. 7) Health|If the couple is in (very)|Pension income partially implications|poor health, taking the|dies with you, and com- |lump sum is a (much) bet-|pletely dies with your |ter option.|spouse. A gamble.

If you’re in poor health you might want to elect to take the lump sum. If you think you are healthier than everyone else, then go for the pension annuity. If you want to leave money to the kids and grandkids, go for the lump sum. But if you’re concerned about not having enough money to live on for the rest of your life, go for the annuity. If you are concerned about managing, investing and allocating your money well into your old age, take the pension annuity. But if you feel comfortable and competent enough to do your own investing, or you have a trusted advisor, go for the lump sum.