Do you mean that Figure 9 wasn't simple enough for you?
http://www.schulmerichandassoc.com/Modern_Portfolio_Decumulation.pdf
I can't answer your question as I'm still digesting it myself.
Yes, agree on your explanation. In my case if I need 4% from my portfolio to support my desired spending and if an annuity pays out 6% at my age, my portfolio can fall by 1/3 (.06-.04/.06) before I need to worry or make a decision on buying an annuity. Ignoring inflation as mentioned by pb.I would answer it as follows:
Assume you "need" $10,000 a month. (For simplification assume no other sources of income like pension or SS).
What amount of $s are needed to secure an SPIA for that income. Let's assume that is $2.5 million (given your age, etc).
So what that says to me is if your assets are depleting, AND are approaching the $2.5 million level your are approaching the "annuitization hurdle". In other words, you should consider swapping assets for the "secure" income stream of an SPIA.
Additionally, to my mind, this serves as a quick and dirty as to whether your portfolio is holding up with regard to your needs.
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But... the SPIA would need to be an inflation adjusted benefit (like SS benefits are), and those SPIAs are very hard to come by... there are some out there, but not many.
Might be good to use as a guide. I may annuitize at some point, but not 100% unless it still leaves me with a nice nest egg.
I would answer it as follows:
Assume you "need" $10,000 a month. (For simplification assume no other sources of income like pension or SS).
What amount of $s are needed to secure an SPIA for that income. Let's assume that is $2.5 million (given your age, etc).
So what that says to me is if your assets are depleting, AND are approaching the $2.5 million level your are approaching the "annuitization hurdle". In other words, you should consider swapping assets for the "secure" income stream of an SPIA.
Additionally, to my mind, this serves as a quick and dirty as to whether your portfolio is holding up with regard to your needs.
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I agree, but this will be worth re-checking occasionally. With interest rates so low right now, there is a paucity of ultra-safe assets insurance companies can use to generate returns. Once the Fed gets their thumb off the scale and interest rates on govt and investment grade bonds start to go up, maybe annuities will pay more. And if they think there's a good chance their investments will stay ahead of inflation (or if they can cheaply insure against the risk that they don't), maybe inflation-protected annuities will become more available, too.And several article I have read indicated that the inflation adjusted annuities are often so much more expensive than an ordinary SPIA that they rarely pan out unless the adjustment is uncapped and the inflation rate is very high for a long time.
That's our plan as well.For that reason, my inflation adjusted annuity is called 'taking SS at 70'. Not to start a debate on that issue again, but for me, it seems to be all the insurance I reasonably need and can afford.
I'd be really worried about dumping my whole nest egg into an SPIA. If I need, for example, $50K a year, it's probably not going to be right around $50K every year. I might need $50K one year, $40K the next, and $60K the year after that due to uneven major expenses, repairs, and replacements. What if that $60K comes before the $40K and puts me behind? I have to go into debt?
Might be good to use as a guide. I may annuitize at some point, but not 100% unless it still leaves me with a nice nest egg.
OK, that makes sense.I think that's why some folks suggest only annuitizing the 'fixed' portion of your spending (again, unrealistically ignoring inflation), but to keep other funds immediately available for the lumpy spending requirements like new roof, appliance replacements, medical deductable, etc....
I would answer it as follows:
Assume you "need" $10,000 a month. (For simplification assume no other sources of income like pension or SS).
What amount of $s are needed to secure an SPIA for that income. Let's assume that is $2.5 million (given your age, etc).
So what that says to me is if your assets are depleting, AND are approaching the $2.5 million level your are approaching the "annuitization hurdle". In other words, you should consider swapping assets for the "secure" income stream of an SPIA.
Additionally, to my mind, this serves as a quick and dirty as to whether your portfolio is holding up with regard to your needs.
Sent from my iPad using Early Retirement Forum
I haven't read the entire article through yet, but it would seem to me that the annuitization hurdle would vary over time. If you're following a 4% rule type of withdrawal methodology, on year 2 you'd want to replace the $10K/month with something a little larger because of inflation. At the same time, however, you have earned a year's worth of mortality credits for the SPIA. And, of course, interest rates might have changed affecting the SPIA payout rate as well. So recalculating the annuitization hurdle each year would probably be a good idea.
You're welcome. It's not a litmus test/definitive call to act, just something it seems wise to be conscious of. I update/review investments/net worth quarterly - getting a new SPIA quote to plot against net worth adds about 20 seconds to my review. Seems like 20 seconds well spent.A big thank you to whomever posted the first reference to "annuitization hurdle".
Yes it would. It's easy to increase the payout assumption by inflation each year for the annuity quote.I haven't read the entire article through yet, but it would seem to me that the annuitization hurdle would vary over time. So recalculating the annuitization hurdle each year would probably be a good idea.
+1But... the SPIA would need to be an inflation adjusted benefit (like SS benefits are), and those SPIAs are very hard to come by... there are some out there, but not many.
Yes. I'll probably calculate my annuitization hurdle based on a fairly Spartan monthly spend rate. If someone is retiring with a 4% WR and they are already at that very bare-bones spending level, then there's no room for a downturn.Interestingly, that inflation adjusted annuity is right about equivalent to a starting 4%/yr SWR. For a lot of people, that annuity hurdle will start looming with any significant downturn.
Great post.+1
I noticed yesterday that the outfit that Vanguard uses for generating their SPIA quotes includes a few with inflation adjusted annuities. You do pay a significant premium. Using me (67) and DW (63) a representative income (AIG) for $1M with a 20 year guaranteed payout and 100% survivor was: $4605.40/mth with no inflation adjustment; $3,609.41mth with 2% annual increase; $3,289.66/mth CPI-U adjusted. So, at our age a 28% reduction in starting income for the full inflation protection. That hit should decrease with age. Also, if you found yourself panicking and turning to an SPIA late in life it could be safer to select a fixed annuity. I went with 20 years guaranteed and a joint annuity to reflect my biases. Going joint life only would add $67.47/mth to starting CPI protected income at our age.
Interestingly, that inflation adjusted annuity is right about equivalent to a starting 4%/yr SWR. For a lot of people, that annuity hurdle will start looming with any significant downturn.
Note: you need to sign on to Vanguard to use the quote generator.
+1
I noticed yesterday that the outfit that Vanguard uses for generating their SPIA quotes includes a few with inflation adjusted annuities. You do pay a significant premium. Using me (67) and DW (63) a representative income (AIG) for $1M with a 20 year guaranteed payout and 100% survivor was: $4605.40/mth with no inflation adjustment; $3,609.41mth with 2% annual increase; $3,289.66/mth CPI-U adjusted. So, at our age a 28% reduction in starting income for the full inflation protection. That hit should decrease with age. Also, if you found yourself panicking and turning to an SPIA late in life it could be safer to select a fixed annuity. I went with 20 years guaranteed and a joint annuity to reflect my biases. Going joint life only would add $67.47/mth to starting CPI protected income at our age.
Interestingly, that inflation adjusted annuity is right about equivalent to a starting 4%/yr SWR. For a lot of people, that annuity hurdle will start looming with any significant downturn.
Note: you need to sign on to Vanguard to use the quote generator.
We would get $4605.40/mth for as long as either of us lived (potentially 30+ years). If we both died in less than 20 years, the payments would continue to our heirs for the 20 year guaranteed period.Help clarify this for me please.
Does this mean that if you paid a single premium of $1 Million, in return you and your wife would $4605.40/ month with no inflation adjustment, for 20 years? IF either one of you were to die, the survivor would continue to receive that pay-out until s/he died, but at the end of 20 years it stops, no matter what?
The lesser amounts would work the same way, except would increase with inflation adjustments?