More retirement income 'advice' ???

[Chuckanut]

First, let me state I am not an enemy of single premium instant annuities. For many people they solve financial problems in a way that is simple and lets them sleep at night. Great!

https://www.nytimes.com/2017/02/18/your-money/retiring-longevity-planning-social-security.html?_r=2

This article recommends purchase of a SPIA at age 70 for this couple so as to avoid plan failure. I have problems with this article:

First, in the comparison table the authors tactfully omit any income from the investment portfolio that is many hundreds of thousands of dollars at age 70.

Second, there is no mention of inflation. The authors seem to assume that the $12,000 SPIA bought at age 70 will buy as many loaves of bread in the distant future as it does on the day it is purchased.

Say the couple spends $298,000 on a single-premium immediate annuity when they retire, and it pays them $12,000 annually. Here, the odds of plan failure fall to zero. “They will always have enough to cover essential living expenses, no matter how long they live or how badly their investments perform,”

Oh, while the table shows they want to spend $80,000 a year, failure happens when they do not generate at least $70,000 a year. It's in the mice type under the table.

Why does this article leave me with a bad taste in my mouth?

 

[nun]

I'm also not totally against SPIAs.....it's just that interest rates have sucked for so long that in my planning they have always looked like a very expensive way to get retirement income.....their guarantee just costs too much. However, when I got the chance to buy into my employer's DB plan I jumped at it as the IRR was 7.5% if I lived to age 83.

The projections done by Mr. Tomlinson might have some bias and I think it would be interesting to run them through FireCalc. But your point about inflation is critical, although some models assume flat or even decreasing expenses as we age.


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[pb4uski]

Firecalc results:

Scenario A: SS at 65: 92.8%
Scenario B: SS at 70: 100.0%
Scenario C: SS at 70 with SPIA: 83.8%

I suspected that the analyst didn't properly account for the impact of inflation in spending, so I changed inflation to zero and got the following:

Scenario A: SS at 65: 100.0%
Scenario B: SS at 70: 100.0%
Scenario C: SS at 70 with SPIA: 98.2%

Not sure where the analyst is getting their numbers but they look flaky to me.

 

[Chuckanut]

Firecalc results:

Scenario A: SS at 65: 92.8%
Scenario B: SS at 70: 100.0%
Scenario C: SS at 70 with SPIA: 83.8%

I suspected that the analyst didn't properly account for the impact of inflation in spending, so I changed inflation to zero and got the following:

Scenario A: SS at 65: 100.0%
Scenario B: SS at 70: 100.0%
Scenario C: SS at 70 with SPIA: 98.2%

Not sure where the analyst is getting their numbers but they look flaky to me.

I agree. Long term zero percent inflation would be a big boost for many investment and withdrawal strategies (all other things being equal). To bad it's not in the cards, unless most of us are badly mistaken.

 

[nun]

Firecalc results:

Scenario A: SS at 65: 92.8%
Scenario B: SS at 70: 100.0%
Scenario C: SS at 70 with SPIA: 83.8%

I suspected that the analyst didn't properly account for the impact of inflation in spending, so I changed inflation to zero and got the following:

Scenario A: SS at 65: 100.0%
Scenario B: SS at 70: 100.0%
Scenario C: SS at 70 with SPIA: 98.2%

Not sure where the analyst is getting their numbers but they look flaky to me.

You beat me to it....I assume you used something like a 60/40 AA.....maybe with a different AA or large investment fees we can approximate Mr. Tomlinson's results?

 

[nun]

Using 0.18% fees and 3% inflation a ~22% equity allocation produces the failure rates for Scenario A in the article.....a similar failure rate is produced using a 60/40 AA with 2% fees.

If we assume 0% inflation then to get the same failure rates as the article you'd need an AA of 10/90 and fees of 3%.

 

[pb4uski]

You beat me to it....I assume you used something like a 60/40 AA.....maybe with a different AA or large investment fees we can approximate Mr. Tomlinson's results?

I used the default AA (70/30). I don't think could get anywhere near a 47% chance of failure. I have no idea how he got his numbers... they make no sense.... he is saying that a 4.1% WR ($41k withdrawal on $1 million for a 65 yo) has a 47% chance of failure, that a 3.1% WR ($22k withdrawal on a $714k portfolio at 70 yo) has a 38% chance of failure and that a 2.4% WR ($10k withdrawal on a $416k portfolio at 70 yo) has a 0% chance of failure.

If he is right and a 3.1% WR for a 70 yo has a 38% chance of failure then there are a whole boatload of us in deep doo-doo... but I think he is messed up.

 

[Cricky]

They need a better annuity provider; even these days a $298000 SPIA should provide more than $12000 per year to a 70-year-old couple. From Immediate Annuities, $1004/month would cost them $191000. When I change the portfolio at 70 from $416000 to $523000, I get 100% success from firecalc for the annuity scenario too.

 

[pb4uski]

Good point... that's a 4% payout rate... very meager for a 70 yo unless it is a COLAed annuity (but he doesn't say it is COLAed and COLAed annuities are not easy to find).

 

[nun]

I used the default AA (70/30). I don't think could get anywhere near a 47% chance of failure. I have no idea how he got his numbers... they make no sense.... he is saying that a 4.1% WR ($41k withdrawal on $1 million for a 65 yo) has a 47% chance of failure, that a 3.1% WR ($22k withdrawal on a $714k portfolio at 70 yo) has a 38% chance of failure and that a 2.4% WR ($10k withdrawal on a $416k portfolio at 70 yo) has a 0% chance of failure.

If he is right and a 3.1% WR for a 70 yo has a 38% chance of failure then there are a whole boatload of us in deep doo-doo... but I think he is messed up.

It's even worse than that as the 65 year old only need withdraw $39k as they have $41k SS....so the article claims a 47% failure rate for a 3.9% withdrawal for 35 years.

 

[nun]

They need a better annuity provider; even these days a $298000 SPIA should provide more than $12000 per year to a 70-year-old couple. From Immediate Annuities, $1004/month would cost them $191000. When I change the portfolio at 70 from $416000 to $523000, I get 100% success from firecalc for the annuity scenario too.

Yes $298k would buy a 70 year old couple almost $19k in joint life annuity income. It's hardly surprising that $58k in SS, $19k in SPIA and $400k in savings would support an $80k retirement.

There are lots of holes in the analysis. I wish financial journalists would do the numbers themselves rather than trusting Financial Advisors.

 

[braumeister]

I wish financial journalists would do the numbers themselves rather than trusting Financial Advisors.

But ... but ... they're EXPERTS!