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Which is the better financial profile?
05-27-2008, 02:38 PM
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#1
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Recycles dryer sheets
Join Date: Oct 2007
Posts: 332
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Which is the better financial profile?
Would it be better to have a portfolio in retirement (60/40) that had to support a needed WD rate of a little under 3% (about a 27 year time horizon) or the same portfolio that was 12% smaller but only had a WD rate of just under 2%? Does it make a difference?
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05-27-2008, 02:41 PM
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#2
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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: 49,311
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Run the numbers in FIRECalc and see what you get.
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Numbers is hard
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05-27-2008, 03:19 PM
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#3
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Thinks s/he gets paid by the post
Join Date: Apr 2007
Posts: 2,358
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Why do you ask? :confused:
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"To know what you prefer, instead of humbly saying Amen to what the world tells you you ought to prefer, is to have kept your soul alive". Robert Louis Stevenson, An Inland Voyage (1878)
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05-27-2008, 03:37 PM
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#4
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Thinks s/he gets paid by the post
Join Date: Nov 2005
Location: Colorado, USA
Posts: 1,127
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I vote for the larger portfolio
Coach
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05-27-2008, 04:04 PM
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#5
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: May 2005
Posts: 16,076
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Quote:
Originally Posted by cashflo2u2
Would it be better to have a portfolio in retirement (60/40) that had to support a needed WD rate of a little under 3% (about a 27 year time horizon) or the same portfolio that was 12% smaller but only had a WD rate of just under 2%? Does it make a difference?
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HUH  ?
Let's say port 1 is $1,000,000... WD rate of 3% is... working hard here... but $30,000
NOW, a portfolio that is 12% SMALLER... or a $880,000 with a WD rate of UNDER 2% (using 2)... you get only $17,600...
Not to hard to say I want #1....
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05-27-2008, 04:07 PM
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#6
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Thinks s/he gets paid by the post
Join Date: Apr 2007
Posts: 2,358
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I guess it depends largely upon how one defines the term "better".
If I understand the original post correctly (I'm not at all sure that I do), my response would be as follows:
A larger portfolio supporting a 3% withdrawal rate will obviously yield more income than a slightly smaller portfolio supporting a 2% rate. But all other things being equal, a smaller withdrawal rate is inherently more sustainable (lower risk) than a higher rate (not that most people would consider 3% to be excessive).
Again, what is the purpose of the enquiry? Something doesn't ring true here.
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"To know what you prefer, instead of humbly saying Amen to what the world tells you you ought to prefer, is to have kept your soul alive". Robert Louis Stevenson, An Inland Voyage (1878)
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05-27-2008, 04:13 PM
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#7
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Recycles dryer sheets
Join Date: Oct 2007
Posts: 463
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I'm guessing portfolio with mortage cost vs. smaller portfolio without mortgage cost.
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TickTock Rule Of Finance - heavily discount any promises of money/benefits to be paid to you in the future
"I've traded love for pennies, sold my soul for less" -Jim Croce, Age
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05-27-2008, 04:27 PM
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#8
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Thinks s/he gets paid by the post
Join Date: Jul 2005
Posts: 4,362
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I'm thinking along the lines of TickTock, some payment that makes a monthly bill go away.
In that case, the 2% case seems better from a safety standpoint. But maybe we're not seeing the other half of the trade-off?
Dan
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05-27-2008, 05:20 PM
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#9
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Recycles dryer sheets
Join Date: Oct 2007
Posts: 332
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I'm sorry that I got everybody all suspicious and mystified. It was not meant to be a trick question but I guess it was a little to cryptic. I didn't want to use the word annuity. The 12% reduction in the portfolio would be from the purchase of a SPIA which in turn results in the specified reduction in the withdrawal rate due to the annuity income. I ran it through FireCalc but have some questions on the output.
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05-27-2008, 05:27 PM
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#10
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Thinks s/he gets paid by the post
Join Date: Feb 2007
Posts: 1,015
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I don't have an answer or opinion to offer here, but I am curious to see the responses now that CashFlo2u2 expanded on the original post.
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05-27-2008, 07:44 PM
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#11
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Thinks s/he gets paid by the post
Join Date: Dec 2004
Location: Minneapolis
Posts: 4,447
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Obviously it is "better" to have a bigger portfolio from which to withdraw money. The withdrawal rate should be lower from a larger portfolio.
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May we live in peace and harmony and be free from all human sufferings.
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05-27-2008, 08:17 PM
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#12
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Thinks s/he gets paid by the post
Join Date: Jul 2005
Posts: 4,362
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Watch out for inflation if it's a non-COLA'd SPIA. You might need to boost the inflation factor in FIRECalc by 1.5x to account for inflation on the SPIA 1% of income.
Then note the ending portfolio values for both cases. If you don't mind the lower portfolio end value, or feel safer with the SPIA, then I'd go with it.
Dan
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05-27-2008, 08:38 PM
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#13
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Mar 2005
Location: Chicago
Posts: 12,616
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Using Texas Proud's example, it appears your annunity would be paying in the 12% range. $120k annunity pays about $12.4k. Do you actually have a quote that high? If so, where from?
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"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
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05-28-2008, 10:15 AM
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#14
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Recycles dryer sheets
Join Date: Oct 2007
Posts: 332
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Quote:
Originally Posted by youbet
Using Texas Proud's example, it appears your annunity would be paying in the 12% range. $120k annunity pays about $12.4k. Do you actually have a quote that high? If so, where from?
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You can (or I should say I can) a $1,000 a month single life SPIA from VG, without inflation adjustments, for about $125,000 ($164,000+- with cpi adj). If one is still left with a decent balanced portfolio, I'm not sure the inflation premium is worth it.
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05-28-2008, 10:18 AM
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#15
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Recycles dryer sheets
Join Date: Oct 2007
Posts: 332
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Quote:
Originally Posted by Animorph
Watch out for inflation if it's a non-COLA'd SPIA. You might need to boost the inflation factor in FIRECalc by 1.5x to account for inflation on the SPIA 1% of income.
Then note the ending portfolio values for both cases. If you don't mind the lower portfolio end value, or feel safer with the SPIA, then I'd go with it.
Dan
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I'm not sure what you mean by boosting the inflation factor. In the box next to where you put in the annuity amount to reduce the first year spending I clicked the box for not inflation adjusted thinking that will take care of it.
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05-28-2008, 10:27 AM
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#16
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Recycles dryer sheets
Join Date: Oct 2007
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Quote:
Originally Posted by REWahoo
Run the numbers in FIRECalc and see what you get.
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I got a "better" answer with the 12% lower portfolio with the difference used to purchase a non inflation SPIA. The results said the beginning portfolio amount to achieve 100% success was slightly smaller than the one without the SPIA plus the highest and lowest residual value was significantly higher with the smaller portfolio. Why, I'm not sure.
btw I define "better" as the superior of one of two alternatives.
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05-28-2008, 10:29 AM
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#17
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Recycles dryer sheets
Join Date: Oct 2007
Posts: 332
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PS I'm am getting fairly proficient with Firecalc and I printed out the Input Data for both models and double checked the figures.
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05-28-2008, 10:40 AM
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#18
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Full time employment: Posting here.
Join Date: Feb 2006
Posts: 987
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Quote:
Originally Posted by cashflo2u2
I got a "better" answer with the 12% lower portfolio with the difference used to purchase a non inflation SPIA. The results said the beginning portfolio amount to achieve 100% success was slightly smaller than the one without the SPIA plus the highest and lowest residual value was significantly higher with the smaller portfolio. Why, I'm not sure.
btw I define "better" as the superior of one of two alternatives.
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Your results are consistant with the results I get using both FIRECalc and Fidelity's Retirement Income Planning tool (the full one - not the "quickie" generally spoken about).
BTW, I do have an SPIA (purchased it last year, upon my retirement, at age 59).
One thing you can't calculate is the "piece of mind" that it gives you. In my case, deciding to ER without a pension or SS to depend upon, it provides a "base" for a good majority of my current income needs.
I purchased it with 10% of my/DW's current retirement portfolio at the time. FYI, it is for a 28 year guaranteed period (longer if one/both of us lives) with remaining payments (either monthly or lump sum) made to our estate.
It dosen't change your AA; however it does reduce the amount of income required such as a pension or SS would do.
Is it the answer for everybody? Of course not. Each of us have our "own lives, own plans". If it works for you - great. If not, so what? Make your own decision, your own plan.
- Ron
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05-28-2008, 10:51 AM
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#19
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Recycles dryer sheets
Join Date: Oct 2007
Posts: 332
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Yes, just for the heck of it, I may keep running this model using lower portfolios and higher SPIA annuities- there must be a tipping point somewhere. Also, use a monte carlo using same figures to see if it confirms.
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05-28-2008, 11:11 AM
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#20
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: May 2005
Posts: 16,076
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Quote:
Originally Posted by cashflo2u2
I got a "better" answer with the 12% lower portfolio with the difference used to purchase a non inflation SPIA. The results said the beginning portfolio amount to achieve 100% success was slightly smaller than the one without the SPIA plus the highest and lowest residual value was significantly higher with the smaller portfolio. Why, I'm not sure.
btw I define "better" as the superior of one of two alternatives.
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That is not the question above.... you never said you were investing the other in a SPIA nor that it would make up for the gap in WD...
Your question was which was better as listed... and it is easily the larger portfolio with a higher WD as you can spend more money each year...
As for you possibly current question.... if you annuitize your whole portfolio you 'do better'... but I would not do it myself..
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