Go with TIPs or am I crazy?

[laurence]

Wow, that's a great saving rate. After income tax, medical and dental insurance premiums, life insurance, vision plan, social security, 401K contributions, I can only save 15% of take-home pay.

Spanky

I'm including 401(k) and principle paid off in the home loan. Strictly calculating swing in net worth if investments stay flat. I wish I could save 15% of take home pay! After 401k and IRA and early payoff on the house, not much left!

 

[Spanky]

Laurence,

Thanks for the clarification.

Spanky

 

[HFWR]

This year I'm putting about 20% in the 401k, to help offset a nice profit sharing check, which we probably won't get next year. But later this year, or early next, I'll drop that to the minimum for the match (4%), and start investing more in taxable and Roth, to provide some diversity when draw down begins.

 

[Helen]

I'm including 401(k) and principle paid off in the home loan.  Strictly calculating swing in net worth if investments stay flat.  I wish I could save 15% of take home pay!  After 401k and IRA and early payoff on the house, not much left!

I can't remember if I'm computing the company match on the 401k or not. I have a spread sheet that breaks down all the different accounts that I am contributing to and one item is the matching contribution. If I pulled the numbers from that spreadsheet then I am including the company match of 5%.

I haven't computed my net savings as it gets complicated with the 401k being before tax.

I do not include my mortgage or my FICA or pension contributions.

Between my partner and I there are a lot of different pots of money out there. All with different tax and withdrawal rules ...

-helen

 

[Art]

Robert, I agree with you.

This thread is fascinating, but... I am surprised not to see any reference to Jim Otar's software (www.retirementoptimizer.com) which seems similar to firecalc(?) BUT allows you to see how the correct use of a SPIA (Single Premium Immediate Annuity) can greatly increase a portfolio's survivability.

Full disclosure: I am a very risk-averse, California licensed Life and Disability Insurance Analyst, and I love fixed annuities in all of their varieties (immediate, deferred, split, CD-type, etc). I also have a NASD Series 7 and 63 which I stopped using in October of 2004 due to my extremely bearish outlook... although due to draconian California compliance developments, I'll have to re-activate these sooner than I planned.

But I'd like to know- as someone new to this forum- has there been any discussion of how SPIAs can increase portfolio survivability regardless of asset class(es)?

Art

 

[laurence]

Hey Art,

I would suggest starting a thread under Hi I am/Introduce yourself here. Your first post saying, "Hey, check out this great investment vehicle!" tends to cause the vets here to chew you up and spit you out for being a salesman pushing an inferior product. Since I'm sure you are not a salesman and your product is not inferior, if you post a little about yourself there we can get to know where you are coming from.

 

[Art]

Hi, Laurence. Thanks for the tip- but I really have nothing to add about myself other than what I included.

I understand your point. But my point is, check out the concept for yourself at the website I mentioned (I'm not affiliated with it in any way- just a new user) and see if it works for your portfolio. Otar is an engineer turned financial planner. Read his articles, use his free DEMO software. He's not the first person to point this out- and when I didn't see any mention of it until the third page (before I posted) I figured I'd bring it to the table. End of story.

Art

 

[laurence]

It's all good, Art! Those who want to will check into your link. Cheers!

 

[eridanus]

As an engineer, my "worst" condition would include the insurance company going broke. So much for the "guaranteed" annuity.

 

[Art]

As an engineer, my "worst" condition would include the insurance company going broke. So much for the "guaranteed" annuity. 

I agree with you. A highly rated (by Weiss Research) insurance company going broke, even in a depression, should be considered a worst-case, although still exceedingly unlikely, condition.

Much more likely would be an out-of-control, runaway U.S. debt load (on-line AND off-line) ultimately scaring off foreign creditors and investors, leading to hyperinflation and depression.

So much for domestic (and maybe even foreign) Vanguard and DFA investments?

 

[laurence]

Why is it more likely? No one thought WorldCom, Enron, Anderson Consulting etc. would bite the dust when it did. You think hyperinflation and another great depression are more likely than a blue chip company going broke? I've never seen the former, but I've seen plenty of the latter in my short stint on the planet.

 

[Art]

"You think hyperinflation and another great depression are more likely than a blue chip company going broke?" 

No. That's not what I said.

I said that the risk of hyperinflation and depression is greater (far greater, IMHO) than the risk of a highly-rated (by Weiss Research) INSURANCE COMPANY going belly up.

Weiss is unique in analyzing an insurance company's ability to withstand severe macroeconomic conditions, including recession and depression, which he clearly defines in his reports.

All currently-highly rated insurance companies (by Weiss) that were around at the time breezed through the 1929 crash and came out smelling like roses.

Also, unlike virtually every other industry that uses GAAP accounting standards, the insurance industry is UNIQUE in being held to much tougher statutory accounting standards.

 

[laurence]

Cool.

To get back to your earlier post: Since my interest in annuities is minimal ( I may consider it when I'm older) my understanding of them is limited. However, you asked if there had been a discussion on the matter, and actually, the longest thread on this board (other than introduce yourself) was on annuities:

http://early-retirement.org/forums/index.php?topic=2195.0

Did you get a chance to check it out? It spells out a lot of regular posters opinions of annuities to some great length and the faults they find with them. In a nutshell, inflation can eat at the value, inflation adjusted pays out way less up front, nothing left for the kids when you pass on. The thread spells it out better than I could. I would welcome a rebuttal to the points made, the "pro-annuity" person on that thread just kept posting the same script over and over, not too helpful. Cheers!

 

[Art]

Cool.

However, you asked if there had been a discussion on the matter, and actually, the longest thread on this board (other than introduce yourself) was on annuities:

http://early-retirement.org/forums/index.php?topic=2195.0

Did you get a chance to check it out? 

No, I didn't know about it- I will check it out when I can, though- thanks for letting me know.

A lot of what you said about the "anti-annuity" position can't be rebutted, nor should it be.

You are WAY too young to consider it.

What I'm sure I'll find, though, is the typical sloppiness you find in ALL annuity discussions: failure to differentiate between variable and fixed, immediate and deferred, annuities, causing all sorts of unnecessary blather.

But back to my first post: it is not debatable nor negotiable that in many situations, based on over 100 years of data, that the prudent use of a good quality SPIA (single premium immediate annuity) can SUBSTANTIALLY increase the survivability of many portfolios, by providing a guaranteed lifetime stream of income that allows other asset classes to grow/recover without being molested (or possibly only being minimally molested) by otherwise required withdrawals.

Unlike FIREcalc- which ignores this critical detail, www.retirementoptimizer.com (sadly, this is not a paid endorsement) allows you to see this for free (you'll have to plug your own SPIA's numbers in- I use Integrity Life, and you can rest assured that I will not be compensated if you do, too).

For the conservatives on this board, like Robert, and Donner (whose posts, I think, are beautifully written) this bad boy could be the missing link in your portfolio.

 

[unclemick]

Yep

Agree - that a low fee SPIA for the right person/case can do the job.

All the other stuff - confusing types, getting sold instead of buying, high fees for some, and incorrect analysis of the applicable individual situation - have led to a lot of bad press and negative backlash.

 

[ats5g]

For articles on annuities and retirement see:


Making Retirement Income Last a Lifetime

Reducing Retirement Income Risks: The Role of Annuitization


- Alec

 

[laurence]

Thanks, I'll check it out. I agree I'm too young at this point, but when I retire, it's good to have a clear view of all options.

 

[Eagle43]

Shouldn't I consider my two pensions an annuity? I mean, they gonna come forever, I hope, or until I die, whichever is first. One pension is military, the other is from a large blue-chip corp. Probably could lose one in the worst scenario, but surely not both.

 

[Art]

Shouldn't I consider my two pensions an annuity? 

Of course you should, as long as they generate lifetime income streams.

 

[ESRBob]

Sure, Social Security could be considered an annuity. If the U.S. govt, despite all its foibles, were to issue annuities, I would actually be interested. Despite assurances to the contrary, I do find the risk of any organization staying afloat for the 60+ years I might need them to be around, enough of a risk that it makes annuities a non-starter for me.

Can anyone spell 'fraud"?

Even AIG is being pulled into the fray for funny business, though I think that is more about how to keep their share price up than monkeying with insureds funds. Still, you never know.

One idea I find interesting, though, is to set up a private annuity with an elderly parent. Parent gives the kids the lumpsum, and the kids promise to pay the parent a regular monthly or annual payment in perpetuity. Kind of solves the problem of whether you are overpaying, or whether fees and commissions are taking up too much of the benefit -- it all stays in the family no matter what.

Not right for everybody, I know, but where it can work, it is a dandy way to transfer assets from older to younger generation. For most early retirees, that means we would be receiving the lumpsum rather than paying it, but that isn't such an awful thing, either.

 

[haha]

One idea I find interesting, though, is to set up a private annuity with an elderly parent.  Parent gives the kids the lumpsum, and the kids promise to pay the parent a regular monthly or annual payment in perpetuity.  Kind of solves the problem of whether you are overpaying, or whether fees and commissions are taking up too much of the benefit -- it all stays in the family no matter what.

Not right for everybody, I know, but where it can work, it is a dandy way to transfer assets from older to younger generation.  For most early retirees, that means we would be receiving the lumpsum rather than paying it, but that isn't such an awful thing, either. 

What would concern me is what happens in a divorce? (A divorce or bankruptcy of the child underwriting the annuity.) I imagine one could theorize all day long, but if push came to shove, who knows what might happen? I would not have wanted to subject my aging parents to the risks in my marriage. Even less would I want to subject myself to the risks in either of my kids' marriages. Or anybodies, for that matter.

haha

 

[Martha]

I have the same worry as HaHa. One way to address that worry is to secure the annuity with collateral. For example, if you deposited the funds from the parents into a brokerage account, you would pledge that account to the parents to secure the obligation to make the payments to the parents. To be valid against your creditors' claims, you would need to perfect that security interest under state law. The broker would have to acknowledge the security interest. For some of my lender clients, I have taken brokerage accounts, including Vanguard accounts, as collateral for a loan. Vanguard was always cooperative. Some brokerages would not cooperate, like Scottrade.

A thought anyway.

 

[tryan]

One idea I find interesting, though, is to set up a private annuity with an elderly parent. Parent gives the kids the lumpsum, and the kids promise to pay the parent a regular monthly or annual payment in perpetuity

I like this idea with vacation homes; or even preferable to reverse mortgages on primary residences if the kids want the house. At least you know where the "borrower" lives.