Prudential White Paper on Maximizing Soc Sec

[cute fuzzy bunny]

Perhaps you entered negative instead of positive numbers or vice versa?

Tell me exactly what you change from the base scenarion.

When I run it and put in my ~$1100 a month@62 vs my ~$1500/mo @67 numbers, I get a higher 95% success withdrawal rate and higher terminal portfolio values for the $1100/early version.

Which makes absolute sense...the social security numbers are intended to pay you exactly the same amount regardless of when you start, providing you die on the date their mortality tables say you will. So unless you outlive the mortality tables, taking it early and using that as income while deferring withdrawal from your taxable and non taxable accounts which continue to grow at far greater rates than the social security adjustment for "waiting".

Just pulling the numbers out separately, if you take the SS early and invest it in a balanced mutual fund, you're somewhere in your mid 70's before you hit the break even point. Add in the later withdrawals from tax deferred accounts like Roths, and you're into your 80's before you start to break even.

 

[cute fuzzy bunny]

And I just verified that.

Pulled up firecalc, put in $13200 in SS per year starting in 2023, got a 95% success withdrawal rate of $33,376 and an average terminal portfolio size of 1,560,967.

Put in $18000 per year starting in 2028, got a 95% success withdrawal rate of $32,172 and an avg terminal size of $1,481,731

So by taking it early, I get over a thousand more a year every year starting right now at 45 years old, and end up with $100k more for my son to inherit.

In simulation and with historic data...of course.

Now, if you're running by the skin of your teeth financially, and when you pass on if you want your spouse to get the highest possible social security amount...totally different story. You wait.

If you're still working past 62 or have other high income sources and dont feel like getting bitten by the tax man, you wait.

I doubt either of those scenarios applies to the average early retiree.

 

[Texas Proud]

CFB...

Wow... I was about to write saying that you might want to wait until 70 if your spouse is younger (much younger) than you... but when I stared, it said warning another post...

If your spouse is younger or much younger (and I am not doing the calcs, but say 10 years younger) it probably would be better to wait until 70 to get you full SS. When you die, she keeps getting the higher amount until she dies... I am not putting all the caveats down...

 

[cute fuzzy bunny]

In my case she's three days older.

And dont think she doesnt get more "younger man, older woman" jokes than she can stand...

 

[hogwild]

I used 17460/yr starting in 2009 and 24,540/yr starting in 2013.

Another thing I did was build a spreadsheet with the first column numbered 60-90. The second column was blank down to the "62" row and I put in 17460 in that cell and increased that amount by 3% down to the "90" row. In the next column I put in 24540 in the "66" cell and increased that by 3% down to the "90" row. I did a similar thing for age 70, but you get the picture.
Then I put in cumulative amounts for all three columns. The "SS-66" cumulative exceeded the "SS-62" cumulative at age 73. The "SS70" cumulative total passed the 62 cumulative at age 81.
Annual income for the 62, 66, and 70 at "terminal" age of 90 was 39,947; 51,381 and 60,013 respectively.

 

[d]

looks like a rather hot subject ... not sure I want to get involved, but unless my calculations are off, it seems the annuities in the illustrations have an internal rate of return of about 4%.  In the examples given with delayed SS, would not the subjects be better to use their IRAs (invested at an assumed 5.75% net of expenses) to provide the equivalent of the annuity income?

 

[jdw_fire]

Wow, nice little temper fit there.  ...  And I never said you sold annuities, I said we had annuity sales people pitching to us here, and the frickin guy who posted right above yours confirms that he does in fact sell annuities.

CFB, I'm sorry for my misunderstanding, however given that your post addressed my post it looked like you were calling me an annuity salesman (you did make it plural) and I don't like being lied about.  My misunderstanding was especially upsetting since I had already stated that I wasn't and you seemed to be ignoring that.

But heres a taste, let me know if you want more.

- You use small numbers in your calcs, under 100k.  Firecalc fails more often with small portfolios than large ones.  Plug in some multi million dollar numbers and you get a different result.

I used small numbers ($100k portfolio) after I checked to ensure that it was scalable.  Here let me show you from FIRECalc:

$100k portfolio provides $3386/yr W/D that is 100% historically successful with residuals quoted from FIRECalc -  "The range was $72 to $634,124, with an average of $181,113."

$1,000K portfolio provides $33,860/yr W/D that is 100% historically successful with residuals quoted from FIRECalc -  "The range was $716 to $6,341,236, with an average of $1,811,134. "

$10,000K portfolio provides $33,8600/yr W/D that is 100% historically successful with residuals quoted from FIRECalc - "The range was $7,165 to $63,412,361, with an average of $18,111,338."

Looks pretty scaleable to me, do you need higher numbers?

But heres a taste, let me know if you want more.

- You dont account for taxes.  Annuities are usually taxed as ordinary income while investors often get the benefits of capital gains rates

You are correct that I don't do the taxes in this example, however I have read on this board where people with a pension look at it as if it is a part of the bond allocation of their portfolio and that seemed like a reasonable thing to do.  If the same was done for an annuity two cases exist; the first is where we have a taxable account and the second is a tax defered account.  

In the first case the taxes would be greater on the income from the bonds if it produced the same W/D schedule.  There are two reasons for this 1) for the bonds to provide any inflation protection some of the taxable income has to remain in the portfolio.  2) Not all of the annuity payment is taxable as some of it is a return of principle.  

In the second case the taxes would be less on the annuity (given the same W/D schedule) because not all of the annuity payment is taxable as some of it is a return of principle.

Both of these treatments are favorable to the annuity.

But heres a taste, let me know if you want more.

- You brush aside survivorship and inheritance issues on one side of the equation without accommodating them on the other.  If I didnt want to leave money (like the case in an annuity), I could consume principal from the investment portfolio at a rate that would exhaust it at some point very late in my life, substantially increasing my spendable income in earlier years when I'm likely to actually appreciate it.

Actually I addressed both.  If you will remember my example for the couple uses two annuities, one for each spouse, to provide the W/D amount that matched FIRECalc's 100% historically successful W/D amount in order to provide what in essence amounts to a 50% spousal benefit on the death of either spouse.  Doing this also left about 1/3 of the portfolio not in the annuities which could be left to grow untouched (even untaxed depending on what it is invesed in or if it is in a tax deferred/free account) to provide for an inheritance.  When I put my example (including this $34575 still in a portfolio) back into FIRECalc, FIRECalc showed a residual ("The range was $34,575 to $1,274,044, with an average of $416,137.") larger than what was left just using FIRECalc on the original $100K ("The range was $72 to $634,124, with an average of $181,113.") .  

To this you replied (among other things) that 2 can live as cheaply as one and you would need a 100% spousal benefit.  I then pointed out that if more income was needed that the 1/3 of the portfolio not in annuities could be used for that purpose and that there was even enough there to buy another inflation adjusted immediate annuity large enough to replace the lost income if that was how one wanted to obtain the replacement income.  Now granted having to replace the income of the dead spouse's annuity would cut into any inheritance ultimately provided.

BTW I have noticed there are single posters here also and for a single person there is no survivorship issue and a single person will leave more inheritance with my annuity example.

But heres a taste, let me know if you want more.

- None of the apples to apples annuity options produce the same amount of income on the annuity side.  Its less.  In some cases (survivorship and CPI indexing) it can be a LOT less.  Your example used small example numbers, so figuring out if the income level produced by an annuity would be satisfactory for someone to live on was not explored.  I see few people concerned about having too MUCH income in retirement.

In my example we have three cases 1) both spouses live the entire 40 yr term used in the $100k FIRECalc run 2) one of the spouses dies earlier and 3) both spouses die earlier.  I responded to 1) above, but let me recap;  the yearly W/D is the same for my example and the $100k FIRECalc run and the residual portfolio (not even counting the annuities) is greater in my example than the $100k FIRECalc run.  I also talked some to 2) above also and here results depend on your choice of replacing the income or not.  There are alot of different cases that could be explored by changing the date of the death of the first spouse and changing the amount of income replaced so I will look at some end points.  Setting the date of the first spouse's death at the day after the first annuity payment (probably the worst case from a math POV) you give up either the equal income stream (by leaving the new $34575 portfolio alone) and retain your higher residual portfolio OR you can maintain the income stream by invading the $34575 portfolio (note: by buying another annuity that pays the same as the one remaining inforce at this early time your portfolio would be almost entirely spent on annuities).  But you don't bive up both.  Case 3) depends on what you did in case 2).

Yes my example used $100k starting out but as I showed above it is scalable.  If the FIRECalc run shows you need $10M to provide the inflation adjusted W/D over 40 yrs that meets your needs then you just multiply my numbers by 100 and it works the same except all the numbers are 100x larger.

But heres a taste, let me know if you want more.

- Your assumption that CPI = inflation, when I pointed out (in my dataless assertions) that such is not the case for a lot of people.

I use CPI because FIRECalc and the annuities use CPI and this keeps the comparison "apples to apples".

But heres a taste, let me know if you want more.

- Your usage of a couple thats 60 years old...short time horizon = larger annuity payouts.  Not sure if you noticed, but this is an EARLY retirement board, not AARP.

Yes I did use a couple that is 60 yo and I think the example still provides value.  Also, I only looked at this one example so I don't know where what I saw in my example falls apart due to a younger age.  BTW I have seen posts on this board from people 60 and older and I expect that many of the posters younger than 60 plan on living past 60 (otherwise your concerns with a survivor benefit are pointless).  

Are you saying that no one can post ideas that may work better for 60 yos than for 45 yos?

So in summary, a retirement age inconsistent with the topic of early retirement, small numbers more likely to cause a failure of a non-annuity example, no attention paid to the tax situation, assumption that cpi=inflation, no attention paid to whether the income produced would be satisfactory since its less than one could get with self investment.

A bunch of issues you didnt address.

I did address all of these issues both above as a recap and in my previous posts.

And you still, for the third time, havent shown an annuity that pays as well as a Wellesley or Target Retirement Income type fund, which is roughly 4% a year paid out and roughly a 4% annual principal adjustment...which is well in excess of the average CPI.  And you still have all that money left over at the end!

Yes I did, here I'll do the math for you.  The inflation adjusted immediately annuity combination I used in my example pays $3386/yr on $65425 ($100,000-$34575) invested which equals 5.175% inflation adjusted.

Show me the "belittling".  You're the one that was flapping his gums about my working wife, although I had ER'ed for 3.5 years before marrying her.

The "belittling" I was refering to was you making up stuff about me quoted here:

Straight from the mouths of people who have already acknowledged that they sell annuities.  Gotcha.

Apparently the annuity outfits pay well enough that the sales people are willing to troll retirement boards

I have already apologized for apparently misunderstanding you.  I also already told you that my comment about your wife's job being like an annuity was just an obsevation not a dig but you seem to not take apologies well either.

 

[New Thinking]

Bunny - I believe that you and Hogwild are making a very common mistake when accounting for SS and trying to decide when to take it. First, consider that the SS amounts that you receive approximately three months prior to your birthday are in "Today's Dollars". But, from what I gather, the FireCalc, like other Monte Carlo simulations, is done in "Future Dollars". Now, Advanced FireCalc might apply a COLA from the age of SS you select on, but it doesn't account for the COLAs from age 62 to age 66 (or 67 in your example). Many people do not consider the COLAs that accrue between age 62 and Full Retirement Age - or age 70 for that matter. This has a dramatic effect when you run the numbers, because you start at a much higher base amount, on which the compounding effect of COLAs really take off. For example, you say you plugged in $1100 at 62 or $1500 at your Full Retirement Age of 67. I would suggest you do it this way..You can start at $1100 which is a 30% drop from $1571 at your Full Retirement Age of 67. But account for the underlying COLA adjustments from age 62 to age 67 and realize that you would start at age 67 with a projected benefit of $1804 per month if you use the 2.8% projected long-term COLA assumptions used by the SS trustees. Plug the $1804 at 67 and then run the numbers.

Others might want to do the same because, I may be wrong, but I think that FIRECalc takes that initial amount and then grows it forward at the assumed COLA rate (input such as CPI).

And, of course, FIRECalc doesn't account for the higher survivor SS benefit or tax savings. When you account for the tax savings, many people would have to generate a 9% or higher return in their investments by taking SS early and IRA withdrawals if they wanted their income to last until age 90.

 

[cute fuzzy bunny]

Maybe you're right that firecalc is using the 2006 dollars I gave it, unadjusted, but i'm not sure. That wouldnt make a lot of sense, so if thats how it works, thats probably incorrect. I'll ask the boss.

Either way though, I would imagine the differences adjusted would be proportional. And the appearance of an even larger income stream at 62 would be even better in deferring my need to tap taxable and tax deferred accounts, which should in aggregate me making more than any annuity I've seen. And again, i'm sure for a lot of people an annuity makes a lot of sense...just probably not for a lot of ER's. Definitely not for me.

JDW - I'm afraid that at this point nobody's reading the thread except for me, you and the annuity sales people. Certainly anyone that is isnt very interested in the tit for tat. What I said stands, I see nothing in your extensive and repetitive retorts to change my opinion. You seem to have a very hard time separating yourself from your ideas and see personal attacks at every turn. I'm sorry about all of that, but I'm afraid you're the one that has to own it. Your wan apologies dont change the appearance that you have little respect for me.

If ego's upset you, I have to again apologize for your shortcoming and my unintentional antagonization of it. How many people do you know used to bring in $3B a year in business, got paid millions and retired at 39 who dont have at least a little bit of an ego?

And once again, good luck with your strategy and despite the emotional issues displayed, once again I'm sure anyone bothering to read the hoo-hah has all the information they need to make their own decision or to support their pre-existing opinions.

 

[dory36]

... I think that FIRECalc takes that initial amount and then grows it forward at the assumed COLA rate (input such as CPI). 

Correct. FC assumes you are using the number from SSA based on your planned retirement. Where it says "if you retire at __ you will get____, that's the number to use if you're retiring at that age. I was able to tell SSA that they should not look for any more contributions from me, and they have been reporting my future income based on no more income ever since.

If you lie to SSA and to FC, your results will lie to you.

 

[jdw_fire]

CFB,  I'm not sure I really want to change your opinion but I can't see anything wrong with my math, my FIRECalc runs or the runs I made on the Vang. site to get the quotes I used, so I am at a loss as to why you seem to disagree with any of these.  Your experence is impressive and I have read many of your other posts over the many years I have been reading this board, leading me to believe you are quite knowledgable, so I expect that you personnally could manage a retirement portfolio better than the FIRECalc results, but again I am at a loss as to why you disagree with my math, my FIRECalc runs or the quotes I obtained from Vang.  One of the reasons for my lengthy replies to your posts is to show you my thought process in detail and to find out from you where in that detail I made a mistake. Are you still telling me that the statements I have made are not correct.  Specifically refering to my last post which of my statements are mathematically incorrect?  Again I can understand if you feel my example is not for you because it just doesn't meet all of your requirements but there are alot of people, of many ages, who read this board who don't have your credentials and may want something a little more hands off with some assurances from a large financial entity.  I have met people that say they really want to retire but are unwilling to invest in anything other that FI investments so I was open to the annuity idea and when I stumbled on the example I posted I couldn't find the problem with it (as I am single I didn't explore the scenerio of one spouse dieing soon after starting the annuities were purchased until I got some feedback on that topic).  Even after exploring my original example with you I still see that as the only downside mathwise, and that downside might be an acceptable risk to some since it means that the spouse would have to die 25 years short of his/her life expectancy.  Finally I meant no disrespet to you, what you read from me started as a frustration that I was not communicating with you and moved to a response to being insulted (an insult that you have since told me was not directed at me; again my apologies for my misunderstanding) combined with more frustration over what appeared to be mathematically nonspecific responses.

 

[Craig]

Let me gently steer this back to one of the questions coming out of the articles ...

Is there a strategy here as well where spouses have very different income situations?  For example, my wife is slightly older than I am, but has always earned much less.  It seems possible that one wise strategy would be to take her SS at age 62 (when I'm 61), and use her SS and our investments to bridge to my own SS at age 66 or later.  When I pass on (assuming before her), she gets a much larger monthly amount, stepped up as a survivor.  If she passed before me, I get no step up anyway, because I had a higher benefit in the first place.  Only downside is that if we each live to a very ripe old age [doesn't seem like such "downside" ], we've given up her incrementally higher benefits, compared to waiting to age 66 ... not too big of a difference based upon her average earnings of maybe $35K/year.

Haven't run all the numbers and cranked up Excel yet, but seems reasonable, no?

 

[Nords]

I merely created a product that would allow people to maximize their Social Security. What I found along the way was information that no one had ever brought up (or rarely brought up). The ability to create a much larger benefit for a widow...The signficant tax savings if you take a higher SS benefit. The ability to play one spouse's benefit off of the other. These are all items that the AARP article and all the others, never brought up.

A couple of points:

First, while this is an interesting article, it's probably only of interest to those ERs who are approaching age 62 or contemplating large IRA balances (and thus large IRA RMDs).

Starting early IRA withdrawals (age 59½ or 72(t)) to manage one's AGI and reduce the impact of SS taxation also eliminates a chance for the IRA to continue its tax-free compounding. That loss of compounding may cost the beneficiary more money than it avoids in taxes. Frankly I don't know the answer to that because I haven't done the math. (Personally we plan to avoid having to do the math altogether because of the next paragraph.) Unless I was staring down a big IRA balance (from an early retiree's limited years of contributions?) I probably wouldn't do the math until I was age 61 and fairly confident that the rules would remain the same while I crunched the numbers.

Second, this paper is not written specifically for ERs and is probably not of general interest to an ER board. In only in two paragraphs of page 14 do I see the word "Roth". After the paper's lengthy discussions on manipulating IRA withdrawals (without violating RMDs!) and avoiding SS taxation, there's only two paragraphs on a way to sidestep the whole issue with a Roth conversion. There's lots of ugly-looking math of IRA & SS taxation but no examples of how a Roth conversion can avoid SS taxation altogether.

This is an important point to early retirees because we typically have a period of low income between stopping W-2 earned income and starting IRA & SS distributions. That (possibly multi-year) window is the perfect opportunity to replace a conventional IRA with a Roth, doing the conversion a little every year up to the top of the 15% tax bracket, and entering your 60s with no RMD issues and unlimited SS flexibility. Yet nowhere does the paper mention this ER issue... and it's not a simple issue!

Third, how much Social Security is an early retiree likely to get? In other words, how important is this concept to an ER? In my case, retiring at age 41 with only a 24-year working history, the SS website calculator claims it'll be about $9K/year at age 62. While the percentages are unchanging, the dollar amounts for ERs (as opposed to "traditional" age 62-65 retirees) will have widely varying effects. Again I'm not likely to check the numbers and make a decision until I'm 61.

Fourth, this paper does a good job of summarizing the issues. However I think Scott Burns, Ed Slott, & Bud Hebeler have covered it better (admittedly over a much longer series of articles). The first two are doing it for the cost of their newspapers or books, and the third is doing it largely for free. None of them charge a commission or an expense ratio or have other potential conflicts of interest.

Instead of more articles, especially from annuity-selling financial-management companies, what we need is a calculator that will cover the complex interaction among IRAs, SS distributions, Roth conversions and the (putative) benefits of an annuity.

If Dory can revise FIRECalc on his own time for free with no conflicts of interest, surely someone who's actually getting paid to analyze this situation can develop a robust calculator to do the same. Otherwise I'll get back to you guys on my 61st birthday...

 

[cute fuzzy bunny]

A couple of points:

Looks like you brought the a-game...

I think the calculations going to be simplified for you and I by the thing not even being there when we get there.

As you noted, it is (or dang well should be!) small potatoes for an ER with a healthy portfolio. Lobster and wine upgrade money, or maybe a charity helper.

Factoring it in to a long range plan (presuming it actually ends up there) having the effect of a lifelong increase in SWR of a thousand bucks (in my case) is sort of interesting though.

As far as the calculators...good luck...figuring the various tax implications and withdrawal strategies is a pretty tough nut. And as many discussions here demonstrate, if there are 5 ways to look at it with a 5-20% difference between them, you'll get 5 different people who are sure their way is the best way and that everyone who thinks otherwise is an egotistical lying jerk.

 

[cute fuzzy bunny]

Is there something I missed here?

Don...if you're still reading, yes theres something missing. For starters, you did a 75% survivor benefit, which would obviously provide a lower payout to your survivor. Further, the ~4% payout is CPI adjusted, which tends to run in the 2.5-3.5% range over the long haul - - and we're definitely talking about a long haul here.

That means the vanguard product is returning 4% for you, will return 3% for your survivor, and provides a total return of 6.5-7.5%.

And when you and the survivor both pass on, there are no more payments to anyone. Moneys gone.

Now go to the vanguard web site and look at the long term returns on Wellesley. Over 10% average annual. Half of that on average was paid out in dividends.

You get more money. You get a higher principal adjustment than CPI to accommodate any variances between CPI and your actual inflation rate. And you get to keep all or most of the money you put in to pass on to heirs, charities, other family members or friends when you pass on.

Granted, an income mutual fund is not going to produce as smoothly and "safely" as an annuity...but back to one of my original points...if you cant take the volatility of a fund like wellesley you're probably not a good candidate for early retirement. That level of risk aversion is going to be tough to overcome if health care costs double, gas goes to $10 a gallon or housing costs shoot up again.

Wellesleys past 35 years of no double digit losing years, no sequential losing years, and generally having a boom year following the losing year make it awfully easy to stomach.

Charles - the idea of leaving the higher benefit to a surviving spouse is a good one. Its covered in the AARP article I linked to a page or two ago. The only balancing act you have to apply to that is the availability of extra cash earlier while you're both still around and in your early 60's vs the survivor getting a few more bucks when they're in their 80's or 90's and single. I guess if the difference in SS makes or breaks the financial picture for the survivor its a no brainer. Otherwise, you might want to apply some quality of life and companionship factors to that income.

And read the last paragraph in the AARP article...the same sentiment that applies to social security applies to this primary topic.

 

[New Thinking]

Charles - You are exactly correct in your thinking. It is often more advantageous to start the lower SS spouse's benefit first and delay the higher benefit. This is because the lower benefit dies off no matter which spouse dies first.

Nords - You may be right. IMO, in the future, the concept of early retirement will most likely be retiring at 58 - 64 as most others will have to work longer because they do not have the resources to retire. It may be me, but I notice a lot of anxiety from some posters when markets are going down and, when inflation starts heating up. Some even worry about providing for their spouses when if they go first. I think creating a large inflation-adjusted income stream (for both spouses) with part of one's portfolio could give people the courage to retire early and the risk-tolerance to be more aggressive with the remaining part of portfolio.

 

[cute fuzzy bunny]

IMO, in the future, the concept of early retirement will most likely be retiring at 58 - 64 as most others will have to work longer because they do not have the resources to retire.

I think thats probably the case right now for a very large majority of people. But as now, there will still be LBMY'ers, business owners, high income people interested in a change of lifestyle and people who "win the lottery" via a number of methods who will retire earlier than their "traditional retirement age" or a few years earlier. This is this web sites primary target audience.

It may be me, but I notice a lot of anxiety from some posters when markets are going down and, when inflation starts heating up.

I've always appreciated people who sell their products based on positive attributes rather than on fear. Of course people get anxious when things arent marching upwards.

Some even worry about providing for their spouses when if they go first.

Absolutely. I've planned for this by setting up an investment strategy that gives my wife the maximum provision in the event of my untimely death.

I think creating a large inflation-adjusted income stream (for both spouses) with part of one's portfolio could give people the courage to retire early and the risk-tolerance to be more aggressive with the remaining part of portfolio.

For the 99,033,273th time...its CPI adjusted, NOT inflation adjusted.

I would find getting an extra 1-2% return on my investments over a 30-40 year period to provide me a lot more courage than a guarantee of a lower return in exchange for an insurance company taking on the risk (and the risk premium).

But I can clearly see how for some people, older, very risk averse, absolutely nobody and no organization they'd like to leave money to and expecting a very long life span...an annuity makes sense.

The whole idea of buying an annuity to avoid taking SS early...again...for people still working, seeing other sources of income where an annuity payment provides better tax treatment than a social security payment or for people who think getting a few hundred extra a month in their 80's will work better for them than getting a thousand or so extra a month in their 60's...might make sense.

 

[Nords]

I think creating a large inflation-adjusted income stream (for both spouses) with part of one's portfolio could give people the courage to retire early and the risk-tolerance to be more aggressive with the remaining part of portfolio.

I trust the inflation-adjusted income stream(s) being provided to me by the U.S. government.  I may not accept their math as equivalent to reality, but they get to make up the rules because they also get to raise taxes (or govt debt) to pay my income.

For anything else my sleep quality would depend on self-annuitizingstreaming in order to avoid having to worry about the survival of an insurance company.  Just like I'd take a lump sum pension/401(k) to avoid having to worry about the survival of an airline or a steel/auto company.

I also get the govt stream without any of the costs, hidden expenses, and high-pressure sales tactics of the insurance company.  Imagine if Social Security or Medicare was marketed to you by MetLife or Prudential or Hancock...

BTW a large part of an inflation-adjusted income stream could also be generated by:
- a few years' expenses in cash while an equity portfolio recovers,
- the short-term bond component of a portfolio (although mainly intended to reduce volatility), and
- I bonds/TIPS.

But that's just my opinion.  I understand that other investors prefer loaded mutual funds, financial advisors, and full-service brokerages too.  Caveat emptor.

 

[donheff]

Don...if you're still reading, yes theres something missing. For starters, you did a 75% survivor benefit, which would obviously provide a lower payout to your survivor. Further, the ~4% payout is CPI adjusted, which tends to run in the 2.5-3.5% range over the long haul - - and we're definitely talking about a long haul here.

I'm baack. Thanks CFB. You just confirmed that I wasn't missing anything substantial. I have no intentions to buy an annuity, I have a very good Fed pension already. When my wife pulls the plug in a few years we will probably roll over her various accounts to an IRA and are struggling with whether we construct the portfolio ourselves with a variety of index funds or go with something like Wellesley, or a mix of both.

But I can understand risk averse people wihout the luxury of an inflation protected defined benefit plan wanting to play it safe. Just read what some of the posters here say: they have just enough to go with 4% withdrawal but are ready to drop in bad years, don't care if they leave anything to the kids, etc. In those circumstances I can see the attraction of covering living expenses with an annuity (knowing when you are gone, that money is gone) and covering travel and fun with the remainder of the portfolio. Then, in a worse case scenario you read books from the library and blogs on the Internet rather than return to work. Yeah, CPI isn't the be all and end all, but it is a reasonable basis for covering general expenses (I am not inviting a flame war here -- I have seen all the debate on this topic).

Elsewhere in this thread there were several mentions about what is good or bad for ERers. But ER is a broad range. A fair number of you ERed at what I would consider very early ages. But probably as many or more of us ER in our mid to late 50s (56 for me) and certainly view that as ER. Most people who retire at 62 when they become eligible for SS would think of themselves as ERing and would value the advice available on this board. The point is, we should remember that we are talking to a variety of people in vastly differing circumstances and should not expect our plans to be best for everyone.

 

[donheff]

For anything else my sleep quality would depend on self-annuitizingstreaming in order to avoid having to worry about the survival of an insurance company. Just like I'd take a lump sum pension/401(k) to avoid having to worry about the survival of an airline or a steel/auto company.

Nords hits my biggest fear on the nail - who do you trust. If United Airlines Fs goes backrupt and Fs over their employees what happens to your annuity if the insurance company goes belly up.

What I have never really understood is how secure these funds we all use are. If Vanguard's annuity could evaporate what about their funds? Is it prudent to diversify you funds among fund providers on the off chance that something catastrophic might befall the fund company? Does this belong in a separate thread?

 

[haha]

A couple of points:

First, while this is an interesting article, it's probably only of interest to those ERs who are approaching age 62 or contemplating large IRA balances (and thus large IRA RMDs). 

Well, that may be a lot of the people here. They don't all shout their ages. And some of the follks here, while younger themselves, may have parents or friends who could benefit from this way of thinking. I guess I don't understand what the downhside of new information might be? Is it a bit like the old days when books were "Banned in Boston" to protect the innocents from their dangerous content?

HA

 

[Nords]

I guess I don't understand what the downhside of new information might be? Is it a bit like the old days when books were "Banned in Boston" to protect the innocents from their dangerous content?

I don't object to new information, and I especially don't object to a vigorous discussion of it, but I also am skeptical of the source of that new info.

We don't call it "Banned in Boston" anymore-- we call it "moderated"...

 

[BigMoneyJim]

but I also am skeptical of the source of that new info.

A company that sells annuities says annuities are useful? And ties in a recent political hotbutton? And fear? Why be skeptical about that?

If I were to redesign this conversation I wouldn't make it as combative, but I think it's a good discussion. My personal bias is that generally annuities are bad--or underperforming at best--for the investor, but they have their niche uses.

 

[haha]

but I also am skeptical of the source of that new info.

A bedrock axiom of psychology is that you don't ever change anyone's mind by presenting novel arguments. You persuade by recasting your new information in old clothes, the old clothes that the person you are trying to persuade is already used to wearing.

In our capitalist economy, almost all or maybe even all information is from an interested party. What makes Bogle or Bernstein more reliable sources of information than the people who wrote the White Paper being discussed?

I am willing to trust myself and others to decide what information is reliable and relevant in our own cases..

But to do this people have to feel free to give the information. After all, no one is pitching us to buy annuities; they are just explaining them, and showing possibly novel applications of the annuity concept.

Seems safe enough to me.  But then, I am kind of a Libertarian.

Ha

 

[haha]

A company that sells annuities says annuities are useful? And ties in a recent political hotbutton? And fear? Why be skeptical about that?

It is just possible that NT is on to something with his mention of fear. Let's wait a few months. If the equity markets continue down we'll se how impervious to fear we all are.

Anyway, this whole retirement thing is about fear. Fear that we won't have enough, fear of cat food, etc. etc. Let's be realistic. Fear of lost sleep, fear of husbands’ or wives’ disapproval and disappointment if things go seriously wrong.

There is a social psych concept called “anchoring”. Basically it means that people set narrow limits around their expectations. Based on recent experience, statements of prominent people or on who knows what. Any discussion of possibilities outside these limits is ignored or attacked.

Then reality comes along and does a lot of limit resetting for folks. 

Ha