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08-04-2014, 05:29 AM
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#1
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Dryer sheet wannabe
Join Date: Aug 2014
Location: Armonk
Posts: 17
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Newcomer Plan Advice
Hi my name is Bill and it was recommended I post here to get advice.
I am 62 and just retired. The question is mostly about my portfolios. I have 2 managed portfolios. One is a 50/40/10 strategic diversified account with Fidelity. The other is a Blackrock Dividend Income portfolio-50/50 spread.
I have enough reserve to go 3 years before I need the spend from the portfolio.
I ran the Firecalc several ways based on my estimated spend.
With the current portfolios I get an 89% success rate
If I buy a deferred annuity (3 years) and then use the Blackrock portfolio and then restimate I get closer to 100%....I have to say this is appealing for a lot of reaons. One the success and 2 the peace of mid of a lifetime gaurantee and the only variable become the Blackrock....
Any help is appreciated
Bill
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08-04-2014, 11:26 AM
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#2
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Thinks s/he gets paid by the post
Join Date: Jul 2005
Posts: 4,366
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An annuity can make FIRECalc results look better. At your age an annuity should pay more than 4%, with no market uncertainty. But, some of that annuity benefit is just a return of your principal, and when you die a basic annuity will have no residual value. Look at the average portfolio values left at the end in FIRECalc for your two cases.
If residual value is not a concern (you want to leave a $0 estate), then an annuity may be a good choice.
Inflation is a big concern with a simple annuity, unless you get an expensive COLA option. Be sure you tell FIRECalc that your annuity income is not COLA'd, and use your full COLA'd expense load to allow it to properly inflate all expenses. You'll be drawing the COLA for your annuity amount from your portfolio, if you end up needing to COLA your expenses. Some may get by without doing that.
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08-04-2014, 11:51 AM
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#3
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Dryer sheet wannabe
Join Date: Aug 2014
Location: Armonk
Posts: 17
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Thanks for the advice
I relooked at the annuity and in reality the numbers kinda stick. The monthly payment is kinda low.
So in order to minimize my risk, which was my big concern I moved to a 30/70 spread. I can afford less return for a little more safety. And with a little bit of modest returns I can outdo the annuity...I hope ....
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08-04-2014, 12:01 PM
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#4
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Thinks s/he gets paid by the post
Join Date: Jul 2005
Posts: 4,366
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Quote:
Originally Posted by wfobrien
Thanks for the advice
I relooked at the annuity and in reality the numbers kinda stick. The monthly payment is kinda low.
So in order to minimize my risk, which was my big concern I moved to a 30/70 spread. I can afford less return for a little more safety. And with a little bit of modest returns I can outdo the annuity...I hope ....
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30% equities might actually be good for you. But that is a little below where the FIRECalc results start to get worse. So make sure you aren't increasing risk by going too low.
At 89% success, I'd just be ready to trim expenses in the event of a serious market downturn. And think of increasing the equity allocation in that event. A little expense flexibility can go a long way.
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08-04-2014, 12:24 PM
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#5
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Dryer sheet wannabe
Join Date: Aug 2014
Location: Armonk
Posts: 17
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Interesting if I change to use the Bernake spend plan and make some adjustments I get to 100%
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08-04-2014, 12:26 PM
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#6
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Dryer sheet wannabe
Join Date: Aug 2014
Location: Armonk
Posts: 17
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also when you say an annuity can yield 4% what kind? The deferred, imediate didnt look that good to me
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08-04-2014, 12:28 PM
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#7
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Recycles dryer sheets
Join Date: May 2013
Posts: 327
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Just another vote against annuities. Interest rates are too low right now for the majority of annuities to work well in your situation. As Animorph mentioned, whether or not you care if you leave an estate matters here as well.
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08-04-2014, 12:31 PM
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#8
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Dryer sheet wannabe
Join Date: Aug 2014
Location: Armonk
Posts: 17
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I dont need to leave an estate...Ive paid for my kids to go to private college - Ive done my share
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08-04-2014, 01:06 PM
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#9
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2002
Location: Texas: No Country for Old Men
Posts: 50,021
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I understand (but don't agree with) the appeal of an annuity, but why Blackrock funds? Aren't there funds at Fidelity and Vanguard with similar performance that have far lower expenses?
__________________
Numbers is hard
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08-04-2014, 01:19 PM
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#10
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Dryer sheet wannabe
Join Date: Aug 2014
Location: Armonk
Posts: 17
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The Blackrock is actually under Fidelity. I just consolidated the original 2 portfolios putting the bulk of it in the Managed spilt 30/70 and some in BlackRock Dividend.
My annuity quote is just ok but I guess interest rates are too low for a good annuity right now. It does look like I catch up to my principal in about 17 years though.....
If I felt really adverse to risk I guess I liquidate and ladder CDs or fixed annuities?
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08-04-2014, 01:53 PM
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#11
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Dryer sheet wannabe
Join Date: Aug 2014
Location: Armonk
Posts: 17
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I was playing with Firecalc again..a combination of SS and an annuity and the rest in a 30/70 portfolio...I reach 100% of spend-even on the constant spend selection as well as Bernake.
If I leave the portfolio without the annuity and use the same spend pattern...I make it in the Bernake at 100% but fall to 65% in the constant send...ugh
My head hurts
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08-04-2014, 02:00 PM
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#12
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2002
Location: Texas: No Country for Old Men
Posts: 50,021
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History shows a better outcome with an equity allocation between 40 and 80 percent, and lower expenses (from Vanguard or Fidelity funds) also gives better results.
Try running FIREcalc using no annuity, and something like a 45/55 AA with an expense ratio of 0.25%.
__________________
Numbers is hard
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08-04-2014, 02:40 PM
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#13
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Thinks s/he gets paid by the post
Join Date: Jul 2005
Posts: 4,366
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You are mentioning managed funds. Is someone trying to sell you an annuity? That's usually a sign to run the other way.
Try www.immediateannuities.com to see examples of simple annuities. I think Fidelity and Vanguard also have online quotes without a lot of work or info. For age 62, male, 3 year deferred single payment immediate annuity with no extra features it gave me about $500/month for a $100k initial payment. That's $6000/year for a "6%" payout rate. Note that that is not an interest rate, since it includes return of principal and we don't know when the stream of payments will end. FIRECalc would have you taking more like 4%, $4000/year, with some non-zero probability of failure, but also inflation adjusted. So there are arguments for either way.
Personally, I'm 100% equities in retirement, with a plan to raise cash in a way I hopes smoothes things out a bit. I'll delay SS until age 70, which is one of the cheapest annuities you can buy at this time. I have no plans to buy an annuity, but if the market crashes long term it is still an option.
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08-04-2014, 02:50 PM
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#14
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Dryer sheet wannabe
Join Date: Aug 2014
Location: Armonk
Posts: 17
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Do I miss something with looking at annuity payouts....doesnt the annuity go for my life and in my calculation I make the principle back in 17 years?
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08-04-2014, 02:57 PM
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#15
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2002
Location: Texas: No Country for Old Men
Posts: 50,021
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Quote:
Originally Posted by wfobrien
Do I miss something with looking at annuity payouts....
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Yes, the impact of inflation, foregone investment returns, insurance fees and commission costs.
__________________
Numbers is hard
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08-04-2014, 03:04 PM
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#16
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Dryer sheet wannabe
Join Date: Aug 2014
Location: Armonk
Posts: 17
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....err Im starting to get the sense that annuities are a last resort? Do they play any role in a conservative portfolio?
I noticed another error in my Firecalc usage...duh. I was putting my spend in with tax adjusted dollars so it was way over stating my need. My actual spend was 25% lower.....which helped me get to 100% with the constant spend selected. Geez
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08-04-2014, 03:07 PM
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#17
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jan 2008
Location: NC
Posts: 21,303
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Like most/many here, an annuity is part of my plan B (or C). Annuity layouts are at historically low levels, IOW the initial cost for $X/yr of income is higher than historically typical, so there's a case to be made in waiting even for those for whom an annuity is part of plan A. As market rates/yields improve (admittedly when is an unknown), annuity costs decrease. Furthermore, even if interest rates stay low, annuity cost decreases because you're simply funding fewer years of annuity income. This post was meant to show both graphically http://www.early-retirement.org/foru...sed-61001.html
And once you buy an annuity, there's no changing your mind, that substantial sum of money is gone forever. The provider will take their cut at the outset too.
But when/if to jump in? Monitor your personal 'annuitization hurdle.' Get a quarterly quote (immediateannuities.com or similar) for the cost of a SPIA (or chosen variety) for the income you want VS the $ amount from your portfolio you're willing to spend on an annuity. If your portfolio declines and you get close to your hurdle, you have a decision to make. But in the meantime if the market does well, you'll enjoy greater returns than any annuity will ever provide, and you may never need one. More here http://www.schulmerichandassoc.com/M...cumulation.pdf
We all have to weigh the above vs what peace of mind is worth. But annuities are not a panacea, there one tool in the retirement income toolbox. And they're not a bargain, especially right now. Best of luck...
__________________
No one agrees with other people's opinions; they merely agree with their own opinions -- expressed by somebody else. Sydney Tremayne
Retired Jun 2011 at age 57
Target AA: 50% equity funds / 45% bonds / 5% cash
Target WR: Approx 1.5% Approx 20% SI (secure income, SS only)
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08-04-2014, 03:11 PM
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#18
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2002
Location: Texas: No Country for Old Men
Posts: 50,021
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Not in mine.
Quote:
Originally Posted by wfobrien
I noticed another error in my Firecalc usage...duh. I was putting my spend in with tax adjusted dollars so it was way over stating my need. My actual spend was 25% lower.....which helped me get to 100% with the constant spend selected. Geez
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The devil is in the details...
FIRECalc considers taxes another expense item.
__________________
Numbers is hard
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08-04-2014, 03:19 PM
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#19
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Dryer sheet wannabe
Join Date: Aug 2014
Location: Armonk
Posts: 17
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that really helped a lot. I was thinking of the annuity as a way to hedge against a huge hit to my portfolio-since other than SS its all I got. I can assume that with a 30/70 mix Im already hedging and of course getting somewhat meager returns.
I was thinking of it as a three piece pie chart with guaranteed $s to cover most expenses along with SS and the annuity. The remainder in the market and kind of play money.
But.....it looks like regardless this is not the best time to buy an annuity because of the low interest rates.
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08-04-2014, 03:20 PM
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#20
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Dryer sheet wannabe
Join Date: Aug 2014
Location: Armonk
Posts: 17
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just to clarify my spend in Firecalc is post tax $s?
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