4% rule for 2018 - Pfau updates the charts

[mickeyd]

Full disclosure: No FA here, no annuities, but I believe straight annuities can make sense for some peoples' situations.

I'm in full agreement. For those who do not have access to pensions or SS, this may be the perfect base to create.

 

[teejayevans]

It's not a specific SPIA; I just went to that annuity calculator website, entered age, age I might take the income, state, sex etc. and you get a dollar amount per month for a given amount invested. Did it just now, got $6,492/year for a $100k premium.

immediateannuities.com

Understand it’s not 6.2% return because they are returning your premium as well, a mutual fund returning 4% with $100K investment and withdrawal of $6000 will last 27 years. And if you die earlier, your family gets what’s leftover. You can also adjust withdrawals as needed.

 

[Lawrence of Suburbia]

My key thing is, how do you know it will last 27 years? Market/economic conditions can change; and the likelihood we'll be blessed with the conditions which allowed the 30+ year stock/bond bull market we've been enjoying continuing is doubtful. Ongoing 6% withdrawals from any mutual fund seem ... brave.

Anyway, the bulk of my own retirement savings will remain in mutual funds; for myself, the idea is to add a SPIA to mainly bump up my age 65 Social Security payout to what it would be at 70. That modest increase has the dramatic effect of allowing dropping my withdrawal rate out the rest of the portfolio from >4% to 3% (approximately).

Don't get me wrong, though; I haven't for sure decided on buying a SPIA. Part of me thinks, just plonk it all in something tried 'n' reasonably true, like Vanguard Wellesley income fund. As you have suggested, but at 4% withdrawal rate.

 

[RobLJ]

Hell, why not .5% as a SWR? Even that won't satisfy some here, although heirs will probably be very fine with it.

Yes, he does state in that article that the 4% WR is not safe for today's environment yet the equation he developed in that article predicts a 4.16% SWR for a 2016 retiree.

I guess we always get back to the general understanding that yes 4% was safe in the past but who knows what kind of crappy environment we may encounter in the future so might as well drop that WR as low as we possibly can just in case.

 

[pb4uski]

My key thing is, how do you know it will last 27 years? Market/economic conditions can change; and the likelihood we'll be blessed with the conditions which allowed the 30+ year stock/bond bull market we've been enjoying continuing is doubtful. Ongoing 6% withdrawals from any mutual fund seem ... brave.

Anyway, the bulk of my own retirement savings will remain in mutual funds; for myself, the idea is to add a SPIA to mainly bump up my age 65 Social Security payout to what it would be at 70. That modest increase has the dramatic effect of allowing dropping my withdrawal rate out the rest of the portfolio from >4% to 3% (approximately).

Don't get me wrong, though; I haven't for sure decided on buying a SPIA. Part of me thinks, just plonk it all in something tried 'n' reasonably true, like Vanguard Wellesley income fund. As you have suggested, but at 4% withdrawal rate.

According to FIRECalc, if you plunked $100k into a 65/35 fund like Wellington, you could withdraw $5,500/year (5.5% payout rate... fixed payments... so similar to a fixed annuity) and have a 93.5% of getting payouts for 40 years.

The tradeoff is that while the payout rate is a little lower and payments are not "guaranteed", if you die early or earlier then your heirs and charities get something... whereas they get nothing with an immediate annuity. Pros and cons.... pick your poison.

 

[audreyh1]

According to FIRECalc, if you plunked $100k into a 65/35 fund like Wellington, you could withdraw $5,500/year (5.5% payout rate... fixed payments... so similar to a fixed annuity) and have a 93.5% of getting payouts for 40 years.

The tradeoff is that while the payout rate is a little lower and payments are not "guaranteed", if you die early or earlier then your heirs and charities get something... whereas they get nothing with an immediate annuity. Pros and cons.... pick your poison.

The FIRECALC withdrawal is adjusted for inflation. You have to find an inflation adjusted SPIA to compare. They are quite expensive = low payout rate.

 

[GTFan]

My key thing is, how do you know it will last 27 years? Market/economic conditions can change; and the likelihood we'll be blessed with the conditions which allowed the 30+ year stock/bond bull market we've been enjoying continuing is doubtful.

The point made here is that nothing is guaranteed including annuities, but in return for that (supposedly) lower risk your investment doesn't compensate. And then it all goes poof when you die.

I have no problem with insomniacs wanting to get an annuity, but don't pretend that it's any safer than a diversified portfolio.

 

[pb4uski]

The FIRECALC withdrawal is adjusted for inflation. You have to find an inflation adjusted SPIA to compare. They are quite expensive = low payout rate.

I purposely set inflation to 0% in FIRECalc to make the comparison apples-to-apples.

 

[audreyh1]

I purposely set inflation to 0% in FIRECalc to make the comparison apples-to-apples.

OK - thanks for clarifying that.

 

[flyingaway]

Maybe we can consider an annuity is as safe as the 4% rule, success rate is around 96%?

 

[pb4uski]

No, I would say that annuities are safer.... probably more like 99.9% given the regulatory oversight, funding, required capital, state guarranty funds, etc.

 

[audreyh1]

According to FIRECalc, if you plunked $100k into a 65/35 fund like Wellington, you could withdraw $5,500/year (5.5% payout rate... fixed payments... so similar to a fixed annuity) and have a 93.5% of getting payouts for 40 years.

The tradeoff is that while the payout rate is a little lower and payments are not "guaranteed", if you die early or earlier then your heirs and charities get something... whereas they get nothing with an immediate annuity. Pros and cons.... pick your poison.

What about for 30 years?

 

[ejman]

No, I would say that annuities are safer.... probably more like 99.9% given the regulatory oversight, funding, required capital, state guarranty funds, etc.

Interesting. But if one sets the WR from a well diversified set of low cost index funds to be equivalent to the real payout from an annuity (say between 2-3% since as you say Insurance companies invest it all in bonds) wouldn't we also get to 99.9% that way?

 

[pb4uski]

What about for 30 years?

97.4%

 

[Lawrence of Suburbia]

According to FIRECalc, if you plunked $100k into a 65/35 fund like Wellington, you could withdraw $5,500/year (5.5% payout rate... fixed payments... so similar to a fixed annuity) and have a 93.5% of getting payouts for 40 years.

The tradeoff is that while the payout rate is a little lower and payments are not "guaranteed", if you die early or earlier then your heirs and charities get something... whereas they get nothing with an immediate annuity. Pros and cons.... pick your poison.

Food for thought, thank you. (I'm still about a year away from making any decisions.) Are you agnostic about the whole 4% SWR business?

 

[pb4uski]

Interesting. But if one sets the WR from a well diversified set of low cost index funds to be equivalent to the real payout from an annuity (say between 2-3% since as you say Insurance companies invest it all in bonds) wouldn't we also get to 99.9% that way?

No, the success rate would be a much lower, but the annuity pricing includes mortality credits... IOW, those who dies early without having received back their entire premium in effect subsidize those who live longer.

 

[Huston55]

The point made here is that nothing is guaranteed including annuities, but in return for that (supposedly) lower risk your investment doesn't compensate. And then it all goes poof when you die.

I have no problem with insomniacs wanting to get an annuity, but don't pretend that it's any safer than a diversified portfolio.

No, I would say that annuities are safer.... probably more like 99.9% given the regulatory oversight, funding, required capital, state guarranty funds, etc.

+1

I think it’s pretty clear that, in many circumstances, annuities are much safer than a diversified portfolio.

 

[GTFan]

There's no way I would classify annuities as 'much safer' given the small percentages here. Some, yes, but if there's a black swan (i.e. systemic financial collapse) nothing is safe.

 

[brewer12345]

There's no way I would classify annuities as 'much safer' given the small percentages here. Some, yes, but if there's a black swan (i.e. systemic financial collapse) nothing is safe.

That is why you have the off-grid bunker, right?

 

[Huston55]

There's no way I would classify annuities as 'much safer' given the small percentages here. Some, yes, but if there's a black swan (i.e. systemic financial collapse) nothing is safe.

That is why you have the off-grid bunker, right?

And lots of MREs.

But, hey, look at the bright side - in the apocalypse, everyone’s FIRE plan lasts as long as they do...100% success rate.

In a more practical vein, and related to Lawrence’s post, below are circumstances that I think warrant consideration of some amount of annuitization.

1. When the retiree has no pension or SS, and begins retirement in Otar’s “Gray Zone”

2. When the retiree prefers a “safety first” approach to retirement income, and has inadequate guaranteed income sources for essential expenses.

3. When a retiree is approaching the “annuity hurdle” due to a bear market and/or spending (see Fullmer).

4. As a substitute for bonds in a one’s AA (see Pfau research).

5. When “Maximum Utility” is most important to the retiree (see Milevsky, Sharpe, et al).

6. When cognitive decline or financial illiteracy/disinterest is a real concern

And, for the record, I’m not a huge annuity ‘fan boy.’ I’ve simply concluded that it is another tool in the toolbox and, under the right circumstances, would likely buy one.

PS: Also, it’s not accurate with SPIAs that ‘you die and poof it’s all gone.’ Go to immediateannuities.com, and you’ll see that the “Cash Refund” option (if you die early, your premiums are paid to your heirs) costs very little; monthly payments are reduced <5%.

 

[GravitySucks]

Delete

 

[pb4uski]

Huh?

 

[Lawrence of Suburbia]

[...]
In a more practical vein, and related to Lawrence’s post, below are circumstances that I think warrant consideration of some amount of annuitization.

1. When the retiree has no pension or SS, and begins retirement in Otar’s “Gray Zone”

2. When the retiree prefers a “safety first” approach to retirement income, and has inadequate guaranteed income sources for essential expenses.

3. When a retiree is approaching the “annuity hurdle” due to a bear market and/or spending (see Fullmer).

4. As a substitute for bonds in a one’s AA (see Pfau research).

5. When “Maximum Utility” is most important to the retiree (see Milevsky, Sharpe, et al).

6. When cognitive decline or financial illiteracy/disinterest is a real concern

And, for the record, I’m not a huge annuity ‘fan boy.’ I’ve simply concluded that it is another tool in the toolbox and, under the right circumstances, would likely buy one.

PS: Also, it’s not accurate with SPIAs that ‘you die and poof it’s all gone.’ Go to immediateannuities.com, and you’ll see that the “Cash Refund” option (if you die early, your premiums are paid to your heirs) costs very little; monthly payments are reduced <5%.

I did the Otar "grey zone" exercise and, sure enough, I'm right in that area. I can "just" afford retirement, and I have anxieties about running out of money. However, this discussion has been a huge help to me. I'm going to continue mulling it over, at least 'til birthday 65 (and Medicare eligibility) rolls around later this year. My current thinking is to annuitize a fairly small portion of my portfolio, enough (when added to my S.S. payments) to pay most expenses related to my little flat, so I'll not ever have to worry about homelessness. This could mean buying a SPIA with about 15-20% of my portfolio. I'd also enjoy a reduction in withdrawal rate from the remaining portfolio (instead of 4%, something closer to 3%.) Thanks all for the candid info!

 

[Onward]

"Annuities are a great way to safely go broke."

"Annuities allow you to eat caviar today and cat food tomorrow."

 

[njhowie]

There's no mutual fund that will pay me 6.2% annually, guaranteed, for the rest of my life.

Can you indicate your age and which insurance company the SPIA is with?

Thanks.