Vanguard Now Offering Inflation-Adjusted Annuities

[intercst]

The immediate life annuities are indexed to the CPI-U. You can get a quote at this link:

http://flagship5.vanguard.com/web/co...nuitiesOV.html

Here's the first year annual benefit for a $100,000 premium for a male living in Delaware

Age 45 --- $2,775 first year

Age 55 --- $3,565

Age 65 --- $4,931

Age 75 --- $7,498

A 2.78% withdrawal for a 45-year-old? I'll keep my stock portfolio.

intercst

[sgeeeee]

My DW and I have pension money that will act like an annuity when it kicks in, and there's social security benefits that I still believe I will probably see in some diminished form -- so I have not had much interest in adding annuities. The cost structure you point out is prohibitive too. But they might be a good deal for that 70 year old who is in excellent health and begins to worry that he/she will outlive their retirement planning.

I think I'll wait till I'm 70 and decide if that makes sense to me then.

[Beachbumz]

It appears that for the risk-adverse 60+ year olds who, like me, want to die broke, that this would provide the magical 4%+ (almost)SWR.

[sgeeeee]

Quote:

It appears that for the risk-adverse 60+ year olds who, like me, want to die broke, that this would provide the magical 4%+ (almost)SWR.

Yes, but you better be able to trust the CPI to reflect your own personal inflation rate or have some built-in slop in your budget. That's why I was looking more at the 70 year old case. You could use part of your portfolio to guarantee a 4% withdrawal and still have some growth money. Then if you live to be 110, you won't be destitute.

[Beachbumz]

good point Salaryguru, that's what the "(almost)" was for.

[mark]

After deducting Medicare B, Social Security may be more like a fixed pension than inflation adjusted income.

Hi Mark..............I'm a little worried about that myself.

JG

[Michael]

Quote:

After deducting Medicare B

Just wait till you see the plan to "modernize" Medicare. It probably won't roll out until the fight over Social Security is over though.

Hmm...

If this is truly a low fee annuity based on actuarial tables and Vanguard's belief in future returns - then this should be the "appropriate withdrawal rate" if you want to die with $0.

I hope it's wrong - since I'm only 45 and all my projections are based on the 4% number on my stock portfolio and "hoping" most of the principal remains.

Comments on why the Vanguard number is wrong? Or does anyone know what the implicit fee percentage number that is built in?

[Michael]

Their number is not wrong, but it is based upon a portfolio primarily of bonds. *If your portfolio is composed primarily of TIPS and Ibonds, the Vanguard number is the approximate withdrawal rate you should use. *Insurance companies don't like the unpredictibility of stocks, so they don't use many of them in their annuity portfolios.

[charlie]

Well, I am 70 and Lyn is 63. We could invest our
IRA's to yield $338.93 per $100,000 indexed to
the CPI. This is 4.07% on the initial investment
for a joint-life annuity capped at 10% max annual
increase with a guarantee to never drop below
the initial rate. Am I interested? You bet! The
starting annual amount is almost exactly what
we are drawing now on my IRA for living expenses.
It is tempting but I am not willing to pull the trigger
yet.

I am going to monitor this for awhile and see if
the expected rise in long rates this year will sweeten
the pot. By the way, about 1/3 of our stash is in
after tax Wellesley Income. We would not annuitize
this money if we convert the IRAs.

I am also researching the wisdom of just putting
everything in Wellesley Income and living off of
the distributions. At the current 3.6% rate, it is
not quite enough yet. Close but no cigar.

Does anybody know how I could get the long term
history of Wellesley's distributions on a per share
basis?

Cheers,

Charlie

[Brat]

My look-back on CPI's gave me (as I recall) 4.7% over the last 23 years. The CPI going forward is dicy IMHO. Also, as health care become a larger portion of our "basket" of goods and services the CPI may not do the job. Have you considered the 5% increase rather than the CPI?

[JWR1945]

Quote:

Well, I am 70 and Lyn is 63. We could invest our IRA's to yield $338.93 per $100,000 indexed to the CPI. This is 4.07% on the initial investment for a joint-life annuity capped at 10% max annual increase with a guarantee to never drop below the initial rate. Am I interested? You bet! The starting annual amount is almost exactly what we are drawing now on my IRA for living expenses. It is tempting but I am not willing to pull the trigger yet. .. Cheers, Charlie

Don't forget TIPS.


At 2% interest they would provide 4.07% of your original balance (plus inflation) for 30 years and leave you 15.8% of your initial balance (plus inflation) at maturity. They have no caps on inflation. OTOH, they will match deflation if it occurs. (You have a guaranteed minimum of par at maturity.)

[There are some approximations built into this calculation. For example, you have to sell some bonds along the way. I am assuming that you can recover the principal without any losses (or gains).]

Have fun.

John R.

The annual dividends for Wellesley from 1994 to 2004 is shown on page 14 of the 9-30-2004 annual report which is available at the Vanguard site under this fund info. I didn't know how to copy and paste this page... sorry.

Richard

[charlie]

I looked at the Vanguard Wellesley Income data
from 1985 through 2004 and found the somewhat
surprising results (to me at least).

Starting in 1985 with $100,000 and following the
strategy of spending the income part of the total
return, you would receive $11370 initially and
$9951 in 2004. The intervening years ranged
from $8114 min to $11698 max. The ending
capital balance would have been $245,535.
The flat income stream was largely due to the
gradual decline in income return from 11.37%
in 1985 to 4.19% in 2004 while the capital base
grew at a 4.59% compound annual return.

OTOH, if you followed the strategy of a 5% annual
draw on the end of year total each year, the income
stream grew from $6371 in 1985 to $16032 in
2004 while the capital balance grew to $298,049.

Thus for the past 20 years, the 5% annual withdrawal
strategy was clearly superior.

Which strategy do you think would be better going
forward? Interest rates may be in for a long term
up-trend while stock returns may not be better
than 7% average going forward for the long term.
My guess is that the compound annual return for
Wellesley going forward will average 6-7%.

I need to spend about 5% annually.

Any suggestions?

Cheers,

Charlie

Not sure exactly what you are asking here Chuck. If you need to spend 5% annually, then you have to spend it.

If you get more than that in Dividends, you can reinvest it.

My personal strategy would be to try to spend less after a down year and spend more after an up year. Kind of rebalance on the SWR.

But as you have indicated in past posts, if you want to buy a toy today and have the money, enjoy it today, because when you're 85, may not be any fun anymore.

[ESRBob]

Charlie,
I know you know this, but I remember once I looked at annuities vs SWR and was falling in love with the annuities, as being marginally higher and yet more secure.... then I remembered, in addition to the money they pay you out through your lifetime, you did also turn over all your capital to them day one. *They are keeping it when you die.

Not sure how you're thinking about *heirs etc, but thought I would mention it.

[Michael]

Quote:

Thus for the past 20 years, the 5% annual withdrawal strategy was clearly superior.

Not a long enough period to validate the strategy. It only worked recently because dividends were so high 20 years ago, leading to a lower withdrawal rate at a constant 5% than if you spent all the dividends. Dividends today are less than 5%, making the dividend withdrawal strategy a lower initial withdrawal rate. In general, any time you take out less at the start of a series, it will outperform a strategy where you take out more.

The early years of the series are the most important, and taking out less allows for time to recover if a bear market hits early on.

[grumpy]

I had been wondering how to factor in the value of my gov't pension into my net worth. I used the Vanguard calculator to get what I think is a reasonable approximation. I put in my monthly pension as the desired monthly annuity amount. I selected joint and survivor with a 50% survivor benefit and I selected fixed income with inflation adjustment. Those characteristics almost match the provisions of my pension.

The calculator shows the lump sum I would have to invest now to begin drawing an immediate annuity benefit equal to my pension. If I didn't have the pension then my net worth would have to be higher by that lump sum to produce that same guarenteed income stream. Right?

Grumpy

[JWR1945]

Quote:

I had been wondering how to factor in the value of my gov't pension into my net worth. I used the Vanguard calculator... The calculator shows the lump sum I would have to invest now to begin drawing an immediate annuity benefit equal to my pension. If I didn't have the pension then my net worth would have to be higher by that lump sum to produce that same guarenteed income stream. Right? Grumpy

You and I do it the same way.

Technically, you would need a bigger lump sum for the same income. The Government has lots of people when they pay retirement annuities. They can rely on statistics. As an individual, you cannot. You have to prepare for the possibility of being lucky..surviving longer than the averages.

Have fun.

John R.