Retirement Income: fixed income, systematic withdrawals or annuities?

[pb4uski]

Quote:

Originally Posted by BBQ-Nut Just curious to see how members here structure their AA for funding expenses in retirement. Do you have enough to totally fund retirement expenses from fixed income sources? Do you have to rely on systematic withdrawals to cover all expenses - and do you use the 4% 'guideline' or a variation of it? Or, did you go the low risk route and buy an annuity? Or - maybe a combination of these? Looks like for my situation, I will use the systematic withdrawal approach - just not enough saved to go fixed income and cover all expenses.

ERd at age 56. I use a total return approach. Dividends and interest would not cover our withdrawals, but dividends, interest and share appreciation do. My target AA is 42% domestic equities, 18% international equities, 22% domestic investment grade corporate bonds, 5% domestic high yield corporate bonds, 7% international bonds and 6% cash/cash equivalents.

Our monthly withdrawal from cash is roughly our annual living expenses less expected taxable account dividends divided by 12 and is on autopilot. A little less than 4%, but will be significantly lower once pensions and SS are online.

No annuity.

Important thing that you are missing is that it is ok to spend appreciation and even principal. That is what you saved it for - to spend it - not to hoard it.

The problem with relying solely on fixed income is that inflation will eat you alive over time unless you have a huge nestegg and a ultra low WR.

[Chuckanut]

I have no problem spending growth. Since my plan for old age insurance and long term care is based upon taking SS at age 70, I am currently selling some growth every year to supplement divident/interest income and my platinum plated solid gold hollow brass and stained pine pension.

My AA is structured for income and growth. I skim the income off and supplement it with growth as needed to cover expenses. When SS cuts in, I expect to avoid using the growth, but I will if I need to. After all, you can't take it with you. Unless things are really bad, my heirs should inherit something significant.

[Major Tom]

Interesting question (referring to the original post). It prompted me to do some Firecalc runs with the level of equities set to 0%, and I was surprised to discover that if my portfolio was 100% fixed income, I could give myself a small raise from my current WR and still not run out of money. This would give me lower portfolio volatility but with lower potential for portfolio growth. (I have a conservative WR, to give my 60/35/5 portfolio a chance of growing in the hope that I can give myself a decent raise in the future.)

After thinking about this, I realized that even if I had a much larger portfolio, I would still keep a good portion of it in equities. As odd as this is going to sound to some people, I am more comfortable with a portfolio containing equities than I would be with one consisting almost entirely of fixed income investments. There is little logic to this, but given that it promises a fair chance of portfolio growth, it's a preference I can live with.

Disclaimer - I am a relative babe at 50 yrs old. Fixed income investments might be looking a good deal more attractive in a couple of decades when I don't have the same amount of time to ride out down periods in the market.

[audreyh1]

I use a total return approach. I have an AA of 53% stock mutual funds and 47% fixed income mutual funds (including cash). This AA is based on my tolerance and long time horizon and has nothing to do with income generation.

Last year my retirement fund threw off 3.9% of the final value in interest, dividends, and capital gains distributions. That more than covered my 3.3% withdrawal at the start of this year, but I still did some additional selling of stock mutual funds to rebalance into fixed income.

If my retirement fund paid out less in distributions, I would have had to sell some mutual funds to cover my withdrawal this year, but I would have just used that to rebalance back to my target AA. That's fine with me.

[Cobra9777]

I just ER'd last year, so not nearly as much experience as these other folks. Currently, our spending is entirely covered by 4 roughly-equal sources: my pension annuity, wife's PT work, rental income on 2 houses, and dividends in our taxable account. I keep 5% of the portfolio in accessible cash, which is about two year's need. In the first 9 months of retirement, the cash balance hasn't budged. I need to work on tax efficiency, but so far, we feel pretty good about how things are going.

When my wife retires in a few years, cashflow will be tighter, although she will also start collecting pension payments at that time. We'll just draw down the cash balance as needed and replenish each January from the after-tax portfolio. The required withdrawals will be fairly small; I calculate less than 1%.

When SS kicks in (10+ years from now), we go back to positive territory... meaning that our inflation-adjusted spending is more-than-covered by: 2 pensions, rental income, taxable dividends, and SS.

To answer the OP's question, if we had no pensions, I would definitely consider using a SPIA. I support the view that some baseline portion of retirement income needs to be "guaranteed." I had a lump sum option on my pension, but took the annuity mainly for that reason. I also think SS (10+ years from now) is highly uncertain, especially for people with other assets and income sources. I hope I'm wrong, but that seems to be the political reality.

[pb4uski]

Quote:

Originally Posted by Cobra9777 ....To answer the OP's question, if we had no pensions, I would definitely consider using a SPIA. I support the view that some baseline portion of retirement income needs to be "guaranteed." I had a lump sum option on my pension, but took the annuity mainly for that reason. I also think SS (10+ years from now) is highly uncertain, especially for people with other assets and income sources. I hope I'm wrong, but that seems to be the political reality.

While I agree, the catch is what percentage of that baseline should be guaranteed? Quicken Lifetime Planner projects that at retirement that SS and pensions will be about 60% of our living expenses when we begin SS, but that % will decline over time as the pension is not COLAed but the living expenses and SS are.

I think (and hope) that you are wrong on SS. There will be much needed tweaks if/when Washington gets the political courage to do so since someone will be unhappy, but I think they will ultimately act to allow the system to keep its promises.

[Cobra9777]

Quote:

Originally Posted by pb4uski ...the catch is what percentage of that baseline should be guaranteed?

Agree. I don't think there is a right or wrong answer. It's a very individual-specific risk decision. Our model starts at 50%, jumps to 65% with the start of SS, and then slowly declines from there. Personally, I would not be comfortable with less than 50%, or at least a dollar figure that was sufficient to cover bare-bones living expenses.

From a purely financial standpoint, I think withdrawing money from a balanced portfolio of stocks and bonds will outperform most SPIAs and pensions in the long run. After looking at rates and doing some basic TVM math, most SPIAs are pretty simple: they amortize the premium to zero over your actuarial life expectancy using a discount rate that is roughly equal to 10-year treasuries. My pension annuity is a little better than that, but not significantly. So why do it? In our case, we simply did not want all (or a large percentage) of our income dependent on market performance. Too many weird things can happen at the wrong time. There's also longevity risk. We were willing to pay a price to have someone else shoulder those risks.

[pb4uski]

I figure that I'm going to continue to dance with the girl that brought me to this ER dance and stay with total return and a healthy allocation of equities.

[vttlarry]

I have been retired for 30 months and my wife for 21 months. We are quite fortunate that my pension alone meets expenses ( thanks to no debt and family retiree health plan). SS will add cushion. I have about 18-24 months of expenses in savings.

[vttlarry]

Sorry, hit send by mistake. We view our ira as a self insured hedge in the absence of LTC insurance, and for any really big purchase we might want. Because of our situation, we do not anticipate withdrawals until RMD in about 12 years. If not for the pension, would probably withdraw dividends and a small amount as needed.