The piece - Spend Without Worry in Retirement?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Topic Author
RIMDBogle
Posts: 369
Joined: Thu Jul 12, 2018 10:13 pm

The piece - Spend Without Worry in Retirement?

Post by RIMDBogle »

The piece - Spend Without Worry in Retirement?
==========================================

Thanks for weighing in to my threads.

As I saw this piece, I thought of sharing with good repute forum like this one.

The piece - Spend Without Worry in Retirement?

https://www.kiplinger.com/retirement/re ... retirement

The author mainly suggest to invest of various kind of annuities.

When I review the past threads in this forum, there was no good opinion expressed about putting money in Annuity.

What do you folks think about this author's idea?

Alternatively, how do we Spend Without Worry in Retirement using Boglehead 3/4 ETF/FUND portfolios ?

Any success stories to share here?

Thanks for your guidance.




Thanks for your guidance
whereskyle
Posts: 1911
Joined: Wed Jan 29, 2020 9:29 am

Re: The piece - Spend Without Worry in Retirement?

Post by whereskyle »

RIMDBogle wrote: Sun Sep 19, 2021 3:29 pm The piece - Spend Without Worry in Retirement?
==========================================

Thanks for weighing in to my threads.

As I saw this piece, I thought of sharing with good repute forum like this one.

The piece - Spend Without Worry in Retirement?

https://www.kiplinger.com/retirement/re ... retirement

The author mainly suggest to invest of various kind of annuities.

When I review the past threads in this forum, there was no good opinion expressed about putting money in Annuity.

What do you folks think about this author's idea?

Alternatively, how do we Spend Without Worry in Retirement using Boglehead 3/4 ETF/FUND portfolios ?

Any success stories to share here?

Thanks for your guidance.




Thanks for your guidance
Annuities have no upside potential, but they also have limited downside potential.

Stocks have plenty of upside potential, but they also have serious downside potential.

A simple solution: annuitize your non-discretionary spending, virtually guaranteeing that you'll be able to meet your necessary living expenses for the foreseeable future (beware of inflation risk though).

Invest the rest, so you know you're maximizing upside potential without taking any excessive risk.

I don't know if I'll actually do this myself. I'm very far from retirement, but I know Wade Pfau has endorsed this two-pronged approach.

Huge caveat: there is always the threat of a serious, hidden risk in the fine print of an annuity contract, so exercise extreme caution before buying one.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
Silk McCue
Posts: 8912
Joined: Thu Feb 25, 2016 6:11 pm

Re: The piece - Spend Without Worry in Retirement?

Post by Silk McCue »

There is nothing new or special about the contents of the article. In general SPIAs (Single Premium Annuities) can be of use in retirement for some and are simply unnecessary for others.

Here are two Wiki’s on Retirement Spending Models and Withdrawal methods for your reading pleasure.

https://www.bogleheads.org/wiki/Introdu ... ing_models

https://www.bogleheads.org/wiki/Withdrawal_methods

Cheers
tibbitts
Posts: 23589
Joined: Tue Feb 27, 2007 5:50 pm

Re: The piece - Spend Without Worry in Retirement?

Post by tibbitts »

RIMDBogle wrote: Sun Sep 19, 2021 3:29 pm When I review the past threads in this forum, there was no good opinion expressed about putting money in Annuity.
There have been many threads on Bogleheads advocating the purchase of annuities, particularly to cover baseline expenses in retirement - and to some extent as a sort of pension substitute. It just depends on your total assets, risk tolerance, etc. So annuities are Boglehead-endorsed when appropriate.

Currently annuities may not be as good a value as at some times in the past when interest rates were higher, and more inflation-adjusted annuities were available. But they can still be useful.
User avatar
JoMoney
Posts: 16260
Joined: Tue Jul 23, 2013 5:31 am

Re: The piece - Spend Without Worry in Retirement?

Post by JoMoney »

Some people have psychological makeup that's more neurotic and prone to "worry" than others. That's not to say the risks aren't real, but some people will feel it differently.
There's always something to worry about, people will rank them in different priorities to how they personally view the risks like "out living your money", inflation, uncertain business/stock returns... There are different responses to mitigate the risks of each, but the mitigation of one tends to leave you more exposed to other risks. I would suggest "diversifying" across stocks/bonds and maybe SPIA.. but a pension or Social Security could easily take the place of a SPIA.

I feel much better with worries about my pile of assets and money then I did when I was worrying about my job and living paycheck to paycheck :wink:
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
User avatar
Sandtrap
Posts: 19582
Joined: Sat Nov 26, 2016 5:32 pm
Location: Hawaii No Ka Oi - white sandy beaches, N. Arizona 1 mile high.

Re: The piece - Spend Without Worry in Retirement?

Post by Sandtrap »

JoMoney wrote: Sun Sep 19, 2021 3:51 pm Some people have psychological makeup that's more neurotic and prone to "worry" than others. That's not to say the risks aren't real, but some people will feel it differently.
There's always something to worry about, people will rank them in different priorities to how they personally view the risks like "out living your money", inflation, uncertain business/stock returns... There are different responses to mitigate the risks of each, but the mitigation of one tends to leave you more exposed to other risks. I would suggest "diversifying" across stocks/bonds and maybe SPIA.. but a pension or Social Security could easily take the place of a SPIA.

I feel much better with worries about my pile of assets and money then I did when I was worrying about my job and living paycheck to paycheck :wink:
Great points.
Well said.

Annuities work for many because of this psychological aspect regardless of costs and returns. Even if not optimal, they don’t care, because the perceived benefits are far greater.
j🌺
Wiki Bogleheads Wiki: Everything You Need to Know
abc132
Posts: 2411
Joined: Thu Oct 18, 2018 1:11 am

Re: The piece - Spend Without Worry in Retirement?

Post by abc132 »

There are a couple reasons to consider an annuity
- you want guaranteed money coming in, not some high probability from your stock/bond AA.
- you want to spend more per year by being able to risk pool vs longevity
- there is a tax benefit to deferring taxes greater than the costs of the annuity (high tax bracket individual)

I was inappropriately sold a variable annuity with high fees in my late 20's. I transferred it to a better variable annuity at Vanguard in 2008, after the 7/6/5/4/3/2/1% transfer fees expired. To be fair it has grown by a factor of almost 7x what I put into it, so even poor investment choices can work out. At age 60 it would offer 4.5% of the age 60 contract value until both my wife and myself die.

For those following the 4% rule as an initial guide for withdrawals, it is easy to see that any amount put into the above annuity before annuitizing will allow a larger initial spend rate than using 4% of the portfolio value. You won't have to cut back to 3% spending in a poor sequence of events. The guaranteed payment will be larger than any guaranteed payments from bonds, so replacing some bonds with a guaranteed payment can make sense if the terms of the annuity are good enough. If the guaranteed income allows you to increase your remaining stock percentage, there are situations where you can come out ahead.

I'm still running my own numbers to see what to do with the annuity we have, and to see what amount of our portfolio might be beneficial.
User avatar
ruralavalon
Posts: 26297
Joined: Sat Feb 02, 2008 9:29 am
Location: Illinois

Re: The piece - Spend Without Worry in Retirement?

Post by ruralavalon »

RIMDBogle wrote: Sun Sep 19, 2021 3:29 pm The piece - Spend Without Worry in Retirement?
==========================================

Thanks for weighing in to my threads.

As I saw this piece, I thought of sharing with good repute forum like this one.

The piece - Spend Without Worry in Retirement?

https://www.kiplinger.com/retirement/re ... retirement

The author mainly suggest to invest of various kind of annuities.

When I review the past threads in this forum, there was no good opinion expressed about putting money in Annuity.

What do you folks think about this author's idea?

. . . .

Thanks for your guidance
As the article says there are many different types of annuities. In general see:
Annuities: Good, Bad Or Ugly?

Many here endorse the idea of using a Single Premium Immediate Annuity (SPIA). A large premium payment gets you a guaranteed stream of income which starts now, and continues for life or a fixed number of years. If interest rates are low, then it's better to buy this later rather than right when you start retirement.

For details see:
Immediateannuities.com

Some here endorse the idea of using a deferred fixed income annuity. You buy a guaranteed stream of income that starts at a future date.

For details see:
Immediate annuities.com/deferred-annuities; and
Fixed deferred annuities, CDs with gotchas.

Most here do NOT endorse other types of high expense complex annuities like equity indexed annuities, variable annuities or the like. They don't really deliver the returns of the index advertised, and you lose a lot because they are expensive. In short the sales pitch is false and misleading.

For details see:
FINRA Alert, Equity-indexed annuities;
The truth about indexed-annuities; and
Variable annuities don't belong in retirement plans.

The criticism of the "4% rule" is nonsense. The so-called "4% rule" is not a rule. It is not a retirement withdrawal portfolio strategy or retirement spending plan.

It is a planning tool to help you decide if your nest egg is likely large enough to support your retirement spending needs. (i.e. nest egg about 25 x expected annual spending net of Social Security and pensions).

RIMDBogle wrote: Sun Sep 19, 2021 3:29 pmAlternatively, how do we Spend Without Worry in Retirement using Boglehead 3/4 ETF/FUND portfolios ?

Any success stories to share here?
Because of physical disability I retired sooner than I wanted with a portfolio nest egg on the low side (22.7 x expected annual spending net of Social Security.)

I considered a SPIA, but decided against it. Interest rates were very low so payout was low at the that time. I reevaluated at age 70, same decision.

The key is flexibility in spending.

Age 76 retired 10 years, no pension or annuity. We are doing fine with a simple four-fund portfolio, our portfolio withdrawal rate is often less than 4%, sometimes higher, but we are flexible and that changes as needed from year to year (to pay for travel, dental care, vision care, medical care, new car, home maintenance or improvements, etc.).
Last edited by ruralavalon on Mon Sep 20, 2021 8:52 am, edited 2 times in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
wrongfunds
Posts: 3187
Joined: Tue Dec 21, 2010 2:55 pm

Re: The piece - Spend Without Worry in Retirement?

Post by wrongfunds »

JoMoney wrote: Sun Sep 19, 2021 3:51 pm I feel much better with worries about my pile of assets and money then I did when I was worrying about my job and living paycheck to paycheck :wink:
My hunch is that you living paycheck to paycheck is just a tad little bit exaggerated :-) Just based upon your posting history :mrgreen:
User avatar
JoMoney
Posts: 16260
Joined: Tue Jul 23, 2013 5:31 am

Re: The piece - Spend Without Worry in Retirement?

Post by JoMoney »

wrongfunds wrote: Mon Sep 20, 2021 8:36 am
JoMoney wrote: Sun Sep 19, 2021 3:51 pm I feel much better with worries about my pile of assets and money then I did when I was worrying about my job and living paycheck to paycheck :wink:
My hunch is that you living paycheck to paycheck is just a tad little bit exaggerated :-) Just based upon your posting history :mrgreen:
I was talking about a past state, not where I am today :wink:
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
User avatar
willthrill81
Posts: 32250
Joined: Thu Jan 26, 2017 2:17 pm
Location: USA
Contact:

Re: The piece - Spend Without Worry in Retirement?

Post by willthrill81 »

whereskyle wrote: Sun Sep 19, 2021 3:44 pm A simple solution: annuitize your non-discretionary spending, virtually guaranteeing that you'll be able to meet your necessary living expenses for the foreseeable future (beware of inflation risk though).

Invest the rest, so you know you're maximizing upside potential without taking any excessive risk.

I don't know if I'll actually do this myself. I'm very far from retirement, but I know Wade Pfau has endorsed this two-pronged approach.
Yes, this approach is referred to as income-flooring, and it's a very plausible idea. This is one of the few times that I agree with Pfau.
whereskyle wrote: Sun Sep 19, 2021 3:44 pm Huge caveat: there is always the threat of a serious, hidden risk in the fine print of an annuity contract, so exercise extreme caution before buying one.
Reading through the contract carefully beforehand is prudent, but the single premium immediate annuities recommended here are usually written in simple, plain language compared to the incredibly dense and confusing variable annuities that are shunned.

There's a strong correlation between the length of the annuity contract and the insurance company's expected profit from the contract.
The Sensible Steward
Escapevelocity
Posts: 1145
Joined: Mon Feb 18, 2019 7:32 am

Re: The piece - Spend Without Worry in Retirement?

Post by Escapevelocity »

Non-COLA annuities, which represent the vast majority of SPIAs are fundamentally limited in their usefulness. I would have a big problem plunking down a large chunk of my portfolio for non-COLA SPIAs without any sense of confidence around the future buying power of the income stream.
User avatar
ruralavalon
Posts: 26297
Joined: Sat Feb 02, 2008 9:29 am
Location: Illinois

Re: The piece - Spend Without Worry in Retirement?

Post by ruralavalon »

Escapevelocity wrote: Mon Sep 20, 2021 9:36 am Non-COLA annuities, which represent the vast majority of SPIAs are fundamentally limited in their usefulness. I would have a big problem plunking down a large chunk of my portfolio for non-COLA SPIAs without any sense of confidence around the future buying power of the income stream.
SPIAs with Cost of Living Adjustments (COLAs) are indeed a rapidly vanishing commodity.

I don't have a SPIA, but still think a non-COLA SPIA can be very useful.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
Escapevelocity
Posts: 1145
Joined: Mon Feb 18, 2019 7:32 am

Re: The piece - Spend Without Worry in Retirement?

Post by Escapevelocity »

ruralavalon wrote: Mon Sep 20, 2021 9:52 am
Escapevelocity wrote: Mon Sep 20, 2021 9:36 am Non-COLA annuities, which represent the vast majority of SPIAs are fundamentally limited in their usefulness. I would have a big problem plunking down a large chunk of my portfolio for non-COLA SPIAs without any sense of confidence around the future buying power of the income stream.
SPIAs with Cost of Living Adjustments (COLAs) are indeed a rapidly vanishing commodity.

I don't have a SPIA, but still think a non-COLA SPIA can be very useful.
I agree in theory, but if you are buying these with an eye of guaranteed income 20-30 years in the future, what if you under-estimate inflation by 1-2%?
User avatar
Sandtrap
Posts: 19582
Joined: Sat Nov 26, 2016 5:32 pm
Location: Hawaii No Ka Oi - white sandy beaches, N. Arizona 1 mile high.

Re: The piece - Spend Without Worry in Retirement?

Post by Sandtrap »

ruralavalon wrote: Mon Sep 20, 2021 9:52 am
Escapevelocity wrote: Mon Sep 20, 2021 9:36 am Non-COLA annuities, which represent the vast majority of SPIAs are fundamentally limited in their usefulness. I would have a big problem plunking down a large chunk of my portfolio for non-COLA SPIAs without any sense of confidence around the future buying power of the income stream.
SPIAs with Cost of Living Adjustments (COLAs) are indeed a rapidly vanishing commodity.

I don't have a SPIA, but still think a non-COLA SPIA can be very useful.
Yes
Great points.
Well said.

Example:
I know a senior friend age 86 who has laddered in multiple non cola spias for he and his DW (separately) floor income over the past 20 years. In the long run it has worked out well for them and they are content with the setup.

SPIAS are not for everyone, but like a tool, has a time and place for each person.
j🌺
Wiki Bogleheads Wiki: Everything You Need to Know
User avatar
ruralavalon
Posts: 26297
Joined: Sat Feb 02, 2008 9:29 am
Location: Illinois

Re: The piece - Spend Without Worry in Retirement?

Post by ruralavalon »

Escapevelocity wrote: Mon Sep 20, 2021 9:59 am
ruralavalon wrote: Mon Sep 20, 2021 9:52 am
Escapevelocity wrote: Mon Sep 20, 2021 9:36 am Non-COLA annuities, which represent the vast majority of SPIAs are fundamentally limited in their usefulness. I would have a big problem plunking down a large chunk of my portfolio for non-COLA SPIAs without any sense of confidence around the future buying power of the income stream.
SPIAs with Cost of Living Adjustments (COLAs) are indeed a rapidly vanishing commodity.

I don't have a SPIA, but still think a non-COLA SPIA can be very useful.
I agree in theory, but if you are buying these with an eye of guaranteed income 20-30 years in the future, what if you under-estimate inflation by 1-2%?
And what if you don't underestimate inflation, your estimate is fairly reasonable, and inflation remains calm?

I do remember the inflation horrors (10-18% year over year) of the late 1970s. But that is not something I expect to see ever again. And if that repeats then a COLAed SPIA may be useless, with the insurer becoming insolvent.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
Escapevelocity
Posts: 1145
Joined: Mon Feb 18, 2019 7:32 am

Re: The piece - Spend Without Worry in Retirement?

Post by Escapevelocity »

ruralavalon wrote: Mon Sep 20, 2021 10:32 am
Escapevelocity wrote: Mon Sep 20, 2021 9:59 am
ruralavalon wrote: Mon Sep 20, 2021 9:52 am
Escapevelocity wrote: Mon Sep 20, 2021 9:36 am Non-COLA annuities, which represent the vast majority of SPIAs are fundamentally limited in their usefulness. I would have a big problem plunking down a large chunk of my portfolio for non-COLA SPIAs without any sense of confidence around the future buying power of the income stream.
SPIAs with Cost of Living Adjustments (COLAs) are indeed a rapidly vanishing commodity.

I don't have a SPIA, but still think a non-COLA SPIA can be very useful.
I agree in theory, but if you are buying these with an eye of guaranteed income 20-30 years in the future, what if you under-estimate inflation by 1-2%?
And what if you don't underestimate inflation, your estimate is fairly reasonable, and inflation remains calm?

I do remember the inflation horrors (10-18% year over year) of the late 1970s. But that is not something I expect to see ever again. And if that repeats then a COLAed SPIA may be useless, with the insurer becoming insolvent.
Doesn't lack of that peace of mind undermine the central thesis of SPIA? If inflation runs just 1% above implied levels from when you buy the SPIA, it turns out to be a pretty lousy deal right?
User avatar
HomerJ
Posts: 21246
Joined: Fri Jun 06, 2008 12:50 pm

Re: The piece - Spend Without Worry in Retirement?

Post by HomerJ »

Escapevelocity wrote: Mon Sep 20, 2021 10:42 am
ruralavalon wrote: Mon Sep 20, 2021 10:32 am
Escapevelocity wrote: Mon Sep 20, 2021 9:59 am
ruralavalon wrote: Mon Sep 20, 2021 9:52 am
Escapevelocity wrote: Mon Sep 20, 2021 9:36 am Non-COLA annuities, which represent the vast majority of SPIAs are fundamentally limited in their usefulness. I would have a big problem plunking down a large chunk of my portfolio for non-COLA SPIAs without any sense of confidence around the future buying power of the income stream.
SPIAs with Cost of Living Adjustments (COLAs) are indeed a rapidly vanishing commodity.

I don't have a SPIA, but still think a non-COLA SPIA can be very useful.
I agree in theory, but if you are buying these with an eye of guaranteed income 20-30 years in the future, what if you under-estimate inflation by 1-2%?
And what if you don't underestimate inflation, your estimate is fairly reasonable, and inflation remains calm?

I do remember the inflation horrors (10-18% year over year) of the late 1970s. But that is not something I expect to see ever again. And if that repeats then a COLAed SPIA may be useless, with the insurer becoming insolvent.
Doesn't lack of that peace of mind undermine the central thesis of SPIA? If inflation runs just 1% above implied levels from when you buy the SPIA, it turns out to be a pretty lousy deal right?
Yep, there is never 100% peace of mind in life.

Just be happy that you're living in the U.S. today. Lots of places and times in history (and today!) where one's biggest worry was a Mongol horde burning your village to the ground, not if a SPIA might lose purchasing power over the years.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
delamer
Posts: 17348
Joined: Tue Feb 08, 2011 5:13 pm

Re: The piece - Spend Without Worry in Retirement?

Post by delamer »

Escapevelocity wrote: Mon Sep 20, 2021 9:59 am
ruralavalon wrote: Mon Sep 20, 2021 9:52 am
Escapevelocity wrote: Mon Sep 20, 2021 9:36 am Non-COLA annuities, which represent the vast majority of SPIAs are fundamentally limited in their usefulness. I would have a big problem plunking down a large chunk of my portfolio for non-COLA SPIAs without any sense of confidence around the future buying power of the income stream.
SPIAs with Cost of Living Adjustments (COLAs) are indeed a rapidly vanishing commodity.

I don't have a SPIA, but still think a non-COLA SPIA can be very useful.
I agree in theory, but if you are buying these with an eye of guaranteed income 20-30 years in the future, what if you under-estimate inflation by 1-2%?
Here’s Willism Bernstein’s idea:
Bernstein recommends a rule of thumb, based on annuity payouts and spending patterns late in life, that you should have 20-25 times your residual living expenses (after pensions/Social Security) invested solely in safe assets. No stocks at all. This should be in TIPS, SPIAs, and short-term bonds. If you have more than that, that's your “risk portfolio”, which he describes this way:

“Anything above that, you can invest in risky assets. That's your risk portfolio. If you dream about taking an around-the-world trip, and the risk portfolio does well, you can use it for that. If the risk portfolio doesn't do well, at least you're not pushing a shopping cart under an overpass.”
From: https://www.whitecoatinvestor.com/berns ... -the-game/

This plan assumes that you retired with more than 25 times residual living expenses. But the risk portfolio can serve as inflation protection in addition to covering luxuries

Regardless of whether you go the non-COLA SPIA route or keep you portfolio fully invested at your preferred asset allocation or follow Bernstein’s advice, there are trade-offs between different types of risks.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
User avatar
willthrill81
Posts: 32250
Joined: Thu Jan 26, 2017 2:17 pm
Location: USA
Contact:

Re: The piece - Spend Without Worry in Retirement?

Post by willthrill81 »

ruralavalon wrote: Mon Sep 20, 2021 9:52 am
Escapevelocity wrote: Mon Sep 20, 2021 9:36 am Non-COLA annuities, which represent the vast majority of SPIAs are fundamentally limited in their usefulness. I would have a big problem plunking down a large chunk of my portfolio for non-COLA SPIAs without any sense of confidence around the future buying power of the income stream.
SPIAs with Cost of Living Adjustments (COLAs) are indeed a rapidly vanishing commodity.

I don't have a SPIA, but still think a non-COLA SPIA can be very useful.
SPIAs with COLAs can still, AFAIK, be obtained easily. The problem is that there are no SPIAs with COLAs that are linked to inflation; they offer only a fixed COLA (e.g., 2%, 3%).

Unless you believe that there is a meaningful likelihood that the Fed will not be able to approximately achieve their desired inflation target of 2% over the long-term, I think that a 2% or 3% COLA is very likely to be fine. If inflation averages 1% higher than your COLA over the long-term, that wouldn't be a problem as most retirees' spending declines about 1% in real dollars per year, at least until about age 90.

But at the same time, I wouldn't recommend that anyone put too much of their portfolio into a SPIA, certainly no more than 50%, and that if their essential spending needs are covered by SS benefits and a SPIA that they should aggressively invest the remainder of their portfolio.
The Sensible Steward
KlangFool
Posts: 31426
Joined: Sat Oct 11, 2008 12:35 pm

Re: The piece - Spend Without Worry in Retirement?

Post by KlangFool »

OP,

We have a COLA based annuity. It is a called social security. We do not need to buy it. For many of us, it covered most of our retirement expenses. So, why do we need to buy even more annuity?

For example, it covers 50% or more of my retirement expenses. With that, my portfolio is at 50X or more of my retirement expense. Why would I need annuity?

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
Escapevelocity
Posts: 1145
Joined: Mon Feb 18, 2019 7:32 am

Re: The piece - Spend Without Worry in Retirement?

Post by Escapevelocity »

KlangFool wrote: Mon Sep 20, 2021 10:54 am OP,

We have a COLA based annuity. It is a called social security. We do not need to buy it. For many of us, it covered most of our retirement expenses. So, why do we need to buy even more annuity?

For example, it covers 50% or more of my retirement expenses. With that, my portfolio is at 50X or more of my retirement expense. Why would I need annuity?

KlangFool
I'm with you on this one. If I felt like the payouts on annuities were somehow a "good deal" I might consider one from the menu of possible investments, but nowadays this is clearly not the case.
randomguy
Posts: 11285
Joined: Wed Sep 17, 2014 9:00 am

Re: The piece - Spend Without Worry in Retirement?

Post by randomguy »

abc132 wrote: Sun Sep 19, 2021 11:03 pm There are a couple reasons to consider an annuity
- you want guaranteed money coming in, not some high probability from your stock/bond AA.
- you want to spend more per year by being able to risk pool vs longevity
- there is a tax benefit to deferring taxes greater than the costs of the annuity (high tax bracket individual)

I was inappropriately sold a variable annuity with high fees in my late 20's. I transferred it to a better variable annuity at Vanguard in 2008, after the 7/6/5/4/3/2/1% transfer fees expired. To be fair it has grown by a factor of almost 7x what I put into it, so even poor investment choices can work out. At age 60 it would offer 4.5% of the age 60 contract value until both my wife and myself die.

For those following the 4% rule as an initial guide for withdrawals, it is easy to see that any amount put into the above annuity before annuitizing will allow a larger initial spend rate than using 4% of the portfolio value. You won't have to cut back to 3% spending in a poor sequence of events. The guaranteed payment will be larger than any guaranteed payments from bonds, so replacing some bonds with a guaranteed payment can make sense if the terms of the annuity are good enough. If the guaranteed income allows you to increase your remaining stock percentage, there are situations where you can come out ahead.

I'm still running my own numbers to see what to do with the annuity we have, and to see what amount of our portfolio might be beneficial.
Is your annuity really paying out 4.5% real for a joint benefit at age 60? That is a sweat deal. When I put my numbers into a calculator I get 4.5% nominal for a 60 year old couple. The SWR in nominal dollars isn't 4%. It is ~6%. So I am getting a much higher payout with the portfolio than a nominal annuity. You are taking on risk and if memory serves the failure case in 1929 is pretty bad because of how deflation factors in.

Replacing bonds with the annuity can work out a bit better but I haven't seen enough math to be convinced for the younger crowd (i.e. under 70. After that mortality credits really can help out). That person who bought their annuity in 1966 feels like they got crushed as they got no benefit of the bond bull market in the 80s but just watched the value of their payouts get decimated over those first 20 years. The 1929 retiree though would have been pretty happy (well if the annuity company didn't fold. That was a rough period of financial companies).
SGM
Posts: 3341
Joined: Wed Mar 23, 2011 4:46 am

Re: The piece - Spend Without Worry in Retirement?

Post by SGM »

I bought a COLA annuity by delaying SS until age 70. DW has a CREF annuity that keeps going up in payments. We also have farm related rental payments that are adjusted upwards yearly. We also have a few payments and a small pension that are not inflation adjusted. We spend without worry.

I thought about buying an SPIA in addition, but the sales people kept trying to add bells and whistles I did not want. So the money I had in a "savings annuity" {a glorified tax deferred CD} I took out and invested in the market. I would never buy a SPIA at age 65. I would buy it at later age when the mortality credits would be better. Later I got a SPIA quote from Fidelity without the bells and whistles, but decided we did not need another annuity at this age and maybe never.
abc132
Posts: 2411
Joined: Thu Oct 18, 2018 1:11 am

Re: The piece - Spend Without Worry in Retirement?

Post by abc132 »

randomguy wrote: Mon Sep 20, 2021 11:07 am
abc132 wrote: Sun Sep 19, 2021 11:03 pm There are a couple reasons to consider an annuity
- you want guaranteed money coming in, not some high probability from your stock/bond AA.
- you want to spend more per year by being able to risk pool vs longevity
- there is a tax benefit to deferring taxes greater than the costs of the annuity (high tax bracket individual)

I was inappropriately sold a variable annuity with high fees in my late 20's. I transferred it to a better variable annuity at Vanguard in 2008, after the 7/6/5/4/3/2/1% transfer fees expired. To be fair it has grown by a factor of almost 7x what I put into it, so even poor investment choices can work out. At age 60 it would offer 4.5% of the age 60 contract value until both my wife and myself die.

For those following the 4% rule as an initial guide for withdrawals, it is easy to see that any amount put into the above annuity before annuitizing will allow a larger initial spend rate than using 4% of the portfolio value. You won't have to cut back to 3% spending in a poor sequence of events. The guaranteed payment will be larger than any guaranteed payments from bonds, so replacing some bonds with a guaranteed payment can make sense if the terms of the annuity are good enough. If the guaranteed income allows you to increase your remaining stock percentage, there are situations where you can come out ahead.

I'm still running my own numbers to see what to do with the annuity we have, and to see what amount of our portfolio might be beneficial.
Is your annuity really paying out 4.5% real for a joint benefit at age 60? That is a sweat deal. When I put my numbers into a calculator I get 4.5% nominal for a 60 year old couple. The SWR in nominal dollars isn't 4%. It is ~6%. So I am getting a much higher payout with the portfolio than a nominal annuity. You are taking on risk and if memory serves the failure case in 1929 is pretty bad because of how deflation factors in.

Replacing bonds with the annuity can work out a bit better but I haven't seen enough math to be convinced for the younger crowd (i.e. under 70. After that mortality credits really can help out). That person who bought their annuity in 1966 feels like they got crushed as they got no benefit of the bond bull market in the 80s but just watched the value of their payouts get decimated over those first 20 years. The 1929 retiree though would have been pretty happy (well if the annuity company didn't fold. That was a rough period of financial companies).
If I understand my contract correctly, my fixed rate is 4.5% nominal of the balance on the date when I annuitize the contract for joint survivors of the same age. The fixed rate has no inflation adjustment. 4% withdrawal method inflation adjusted will soon be higher than 4.5% nominal, but it is the first few years that matter for sequence of returns risk. This is when you might be comparing 3% when you decide to lower spending in a poor sequence to 4.5% from the annuity.

I agree with you about the younger crowd, but since I have the product already I may as well evaluate liquidating it vs further funding it. Liquidation in a low tax bracket is the most likely choice. If we see changes in tax deferred space, there may be an increase in the use of low cost annuities for additional tax deferred space by those in high income brackets.
whereskyle
Posts: 1911
Joined: Wed Jan 29, 2020 9:29 am

Re: The piece - Spend Without Worry in Retirement?

Post by whereskyle »

ruralavalon wrote: Mon Sep 20, 2021 9:52 am
Escapevelocity wrote: Mon Sep 20, 2021 9:36 am Non-COLA annuities, which represent the vast majority of SPIAs are fundamentally limited in their usefulness. I would have a big problem plunking down a large chunk of my portfolio for non-COLA SPIAs without any sense of confidence around the future buying power of the income stream.
SPIAs with Cost of Living Adjustments (COLAs) are indeed a rapidly vanishing commodity.

I don't have a SPIA, but still think a non-COLA SPIA can be very useful.
Especially where the expenses meant to be covered are fixed, such as a mortgage payment or car payment. Limiting SPIAs to cover expenses such as these might be prudent.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
KlangFool
Posts: 31426
Joined: Sat Oct 11, 2008 12:35 pm

Re: The piece - Spend Without Worry in Retirement?

Post by KlangFool »

whereskyle wrote: Mon Sep 20, 2021 11:53 am
ruralavalon wrote: Mon Sep 20, 2021 9:52 am
Escapevelocity wrote: Mon Sep 20, 2021 9:36 am Non-COLA annuities, which represent the vast majority of SPIAs are fundamentally limited in their usefulness. I would have a big problem plunking down a large chunk of my portfolio for non-COLA SPIAs without any sense of confidence around the future buying power of the income stream.
SPIAs with Cost of Living Adjustments (COLAs) are indeed a rapidly vanishing commodity.

I don't have a SPIA, but still think a non-COLA SPIA can be very useful.
Especially where the expenses meant to be covered are fixed, such as a mortgage payment or car payment. Limiting SPIAs to cover expenses such as these might be prudent.
whereskyle,

Why do that instead of paying off the loan?

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
abc132
Posts: 2411
Joined: Thu Oct 18, 2018 1:11 am

Re: The piece - Spend Without Worry in Retirement?

Post by abc132 »

KlangFool wrote: Mon Sep 20, 2021 10:54 am OP,

We have a COLA based annuity. It is a called social security. We do not need to buy it. For many of us, it covered most of our retirement expenses. So, why do we need to buy even more annuity?

For example, it covers 50% or more of my retirement expenses. With that, my portfolio is at 50X or more of my retirement expense. Why would I need annuity?

KlangFool
As someone that sits with 5 years of cash and and additional 40% bonds, I'm curious if you have ever ran any numbers on an annuity. You have expressed your fears many times on this forum and routinely extended that fear on others, and it seems you could have insured against them and saved yourself all of that angst, and with less than 50x expenses.

Maybe a better question is at what multiple of expenses you switched from fear of employment loss to why would we want a fully guaranteed income stream?
randomguy
Posts: 11285
Joined: Wed Sep 17, 2014 9:00 am

Re: The piece - Spend Without Worry in Retirement?

Post by randomguy »

abc132 wrote: Mon Sep 20, 2021 11:47 am
If I understand my contract correctly, my fixed rate is 4.5% nominal of the balance on the date when I annuitize the contract for joint survivors of the same age. The fixed rate has no inflation adjustment. 4% withdrawal method inflation adjusted will soon be higher than 4.5% nominal, but it is the first few years that matter for sequence of returns risk. This is when you might be comparing 3% when you decide to lower spending in a poor sequence to 4.5% from the annuity.

I agree with you about the younger crowd, but since I have the product already I may as well evaluate liquidating it vs further funding it. Liquidation in a low tax bracket is the most likely choice. If we see changes in tax deferred space, there may be an increase in the use of low cost annuities for additional tax deferred space by those in high income brackets.
4%

The point is that if you are happy with a nominal withdrawal, you aren't taking 4% out of the portfolio. You are taking 5-6% and your money will still last 30 years something like 97% of the time. You get drastically more money with a portfolio than an annuity until you get old enough for mortality credits to add significantly to your return.

Just because things are percents (divident payouts, SS increases, annuity payouts, SWR,....) doesn't mean we can compare them. Let's say our SWR is cut to 3%. Would you prefer that to 4.5% after 10 years of retirement? Do take the 63k (3% real for the 1970 retire) or the 45k? Of course you could have retired in 1930 and be looking at the reverse. Mixing up real and nominal is just misleading.
KlangFool
Posts: 31426
Joined: Sat Oct 11, 2008 12:35 pm

Re: The piece - Spend Without Worry in Retirement?

Post by KlangFool »

abc132 wrote: Mon Sep 20, 2021 12:46 pm
it seems you could have insured against them and saved yourself all of that angst, and with less than 50x expenses.
abc132,

And, you would be wrong.

A) The 50X expense is when I am at 67 years old and social security cover 50% of my retirement expense.

B) But, realistically, I would not be working until 67 years old. Hence, I need 25X my current annual expense way before 62 years old.

I am aiming for Financial Independence. Aka, stop working at any age. I am NOT aiming for retirement.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
reln
Posts: 718
Joined: Fri Apr 19, 2019 4:01 pm

Re: The piece - Spend Without Worry in Retirement?

Post by reln »

RIMDBogle wrote: Sun Sep 19, 2021 3:29 pm The piece - Spend Without Worry in Retirement?
==========================================

Thanks for weighing in to my threads.

As I saw this piece, I thought of sharing with good repute forum like this one.

The piece - Spend Without Worry in Retirement?

https://www.kiplinger.com/retirement/re ... retirement

The author mainly suggest to invest of various kind of annuities.

When I review the past threads in this forum, there was no good opinion expressed about putting money in Annuity.

What do you folks think about this author's idea?

Alternatively, how do we Spend Without Worry in Retirement using Boglehead 3/4 ETF/FUND portfolios ?

Any success stories to share here?

Thanks for your guidance.




Thanks for your guidance
This is true. Retirees that save a lot end up with more money a decade later. That is to say they don't enjoy their life as much as they could have (unless they derive a lot more joy from looking at 7+ figure numbers on a screen/paper than doing things).
abc132
Posts: 2411
Joined: Thu Oct 18, 2018 1:11 am

Re: The piece - Spend Without Worry in Retirement?

Post by abc132 »

randomguy wrote: Mon Sep 20, 2021 12:51 pm
abc132 wrote: Mon Sep 20, 2021 11:47 am
If I understand my contract correctly, my fixed rate is 4.5% nominal of the balance on the date when I annuitize the contract for joint survivors of the same age. The fixed rate has no inflation adjustment. 4% withdrawal method inflation adjusted will soon be higher than 4.5% nominal, but it is the first few years that matter for sequence of returns risk. This is when you might be comparing 3% when you decide to lower spending in a poor sequence to 4.5% from the annuity.

I agree with you about the younger crowd, but since I have the product already I may as well evaluate liquidating it vs further funding it. Liquidation in a low tax bracket is the most likely choice. If we see changes in tax deferred space, there may be an increase in the use of low cost annuities for additional tax deferred space by those in high income brackets.
4%

The point is that if you are happy with a nominal withdrawal, you aren't taking 4% out of the portfolio. You are taking 5-6% and your money will still last 30 years something like 97% of the time. You get drastically more money with a portfolio than an annuity until you get old enough for mortality credits to add significantly to your return.

Just because things are percents (divident payouts, SS increases, annuity payouts, SWR,....) doesn't mean we can compare them. Let's say our SWR is cut to 3%. Would you prefer that to 4.5% after 10 years of retirement? Do take the 63k (3% real for the 1970 retire) or the 45k? Of course you could have retired in 1930 and be looking at the reverse. Mixing up real and nominal is just misleading.
The fair comparison is what is being done with the assets, and I am not making the type of extrapolation you claim. Compare a stock bond portfolio that withdraws 3% in a poor early sequence to a stock/annuity portfolio. Entirely annuitizing everything is not a general recommendation, so it is an odd assumption to make.

Compare income flooring to annuitize basic needs and a remaining portfolio with a high amount of stocks to a traditional stock/bond portfolio. In some cases the annuity method will win. In some cases it will lose. I recommend doing a calculation before oversimplifying the problem to one preferred answer.
abc132
Posts: 2411
Joined: Thu Oct 18, 2018 1:11 am

Re: The piece - Spend Without Worry in Retirement?

Post by abc132 »

KlangFool wrote: Mon Sep 20, 2021 1:00 pm
abc132 wrote: Mon Sep 20, 2021 12:46 pm
it seems you could have insured against them and saved yourself all of that angst, and with less than 50x expenses.
abc132,

And, you would be wrong.

A) The 50X expense is when I am at 67 years old and social security cover 50% of my retirement expense.

B) But, realistically, I would not be working until 67 years old. Hence, I need 25X my current annual expense way before 62 years old.

I am aiming for Financial Independence. Aka, stop working at any age. I am NOT aiming for retirement.

KlangFool
The point is that you could have reached financial independence much sooner with an annuity, if that truly was your goal.

16x expenses with 2 year of cash for joint survivor at age 60 would have done the trick, and any further savings would be in stocks.

You may have legacy goals that make the annuity a poor choice, but if that is the case you should be talking about legacy goals and not financial independence.
KlangFool
Posts: 31426
Joined: Sat Oct 11, 2008 12:35 pm

Re: The piece - Spend Without Worry in Retirement?

Post by KlangFool »

abc132 wrote: Mon Sep 20, 2021 1:51 pm
KlangFool wrote: Mon Sep 20, 2021 1:00 pm
abc132 wrote: Mon Sep 20, 2021 12:46 pm
it seems you could have insured against them and saved yourself all of that angst, and with less than 50x expenses.
abc132,

And, you would be wrong.

A) The 50X expense is when I am at 67 years old and social security cover 50% of my retirement expense.

B) But, realistically, I would not be working until 67 years old. Hence, I need 25X my current annual expense way before 62 years old.

I am aiming for Financial Independence. Aka, stop working at any age. I am NOT aiming for retirement.

KlangFool
The point is that you could have reached financial independence much sooner with an annuity, if that truly was your goal.
abc132,

I do not trust annuity. If you do, that is your choice.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
User avatar
HomerJ
Posts: 21246
Joined: Fri Jun 06, 2008 12:50 pm

Re: The piece - Spend Without Worry in Retirement?

Post by HomerJ »

KlangFool wrote: Mon Sep 20, 2021 1:00 pm
abc132 wrote: Mon Sep 20, 2021 12:46 pm
it seems you could have insured against them and saved yourself all of that angst, and with less than 50x expenses.
abc132,

And, you would be wrong.

A) The 50X expense is when I am at 67 years old and social security cover 50% of my retirement expense.

B) But, realistically, I would not be working until 67 years old. Hence, I need 25X my current annual expense way before 62 years old.

I am aiming for Financial Independence. Aka, stop working at any age. I am NOT aiming for retirement.

KlangFool
You don't really need 25x before 62 or 67.

You can do it in buckets. You need 12.5x and SS at 67 (since SS gives you the other 50%)

Then you need enough to get to 67. If you're 57, that is only 10x, so 22.5x is enough. (Actually 20x is probably enough, 10x to get from 57-67, which gives the 10x ten years to grow to 12.5x.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
KlangFool
Posts: 31426
Joined: Sat Oct 11, 2008 12:35 pm

Re: The piece - Spend Without Worry in Retirement?

Post by KlangFool »

HomerJ wrote: Mon Sep 20, 2021 2:40 pm
KlangFool wrote: Mon Sep 20, 2021 1:00 pm
abc132 wrote: Mon Sep 20, 2021 12:46 pm
it seems you could have insured against them and saved yourself all of that angst, and with less than 50x expenses.
abc132,

And, you would be wrong.

A) The 50X expense is when I am at 67 years old and social security cover 50% of my retirement expense.

B) But, realistically, I would not be working until 67 years old. Hence, I need 25X my current annual expense way before 62 years old.

I am aiming for Financial Independence. Aka, stop working at any age. I am NOT aiming for retirement.

KlangFool
You don't really need 25x before 62 or 67.

You can do it in buckets. You need 12.5x and SS at 67 (since SS gives you the other 50%)

Then you need enough to get to 67. If you're 57, that is only 10x, so 22.5x is enough. (Actually 20x is probably enough, 10x to get from 57-67, which gives the 10x ten years to grow to 12.5x.
<<If you're 57, that is only 10x, so 22.5x is enough.>>

How would I knew that I would be employed until that age? I don't. Many of my peers are permanently unemployed or under-employed before then.

At 22.5X, it is close enough to 25X that it won't matter to me. I save 1X per year.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
abc132
Posts: 2411
Joined: Thu Oct 18, 2018 1:11 am

Re: The piece - Spend Without Worry in Retirement?

Post by abc132 »

KlangFool wrote: Mon Sep 20, 2021 2:13 pm
abc132 wrote: Mon Sep 20, 2021 1:51 pm
KlangFool wrote: Mon Sep 20, 2021 1:00 pm
abc132 wrote: Mon Sep 20, 2021 12:46 pm
it seems you could have insured against them and saved yourself all of that angst, and with less than 50x expenses.
abc132,

And, you would be wrong.

A) The 50X expense is when I am at 67 years old and social security cover 50% of my retirement expense.

B) But, realistically, I would not be working until 67 years old. Hence, I need 25X my current annual expense way before 62 years old.

I am aiming for Financial Independence. Aka, stop working at any age. I am NOT aiming for retirement.

KlangFool
The point is that you could have reached financial independence much sooner with an annuity, if that truly was your goal.
abc132,

I do not trust annuity. If you do, that is your choice.

KlangFool
That's a fair reason, as personal finance is personal.

I was clear I have made no choice, and that I am looking at the financial merits of my decision.

I encourage other readers to do the same.
afan
Posts: 8169
Joined: Sun Jul 25, 2010 4:01 pm

Re: The piece - Spend Without Worry in Retirement?

Post by afan »

If I were to buy an annuity now to cover living expenses I would be extremely worried about inflation. Assuming that these historically low rates will persist for decades is the definition of whistling past the grave yard.
No one wanted high inflation the last time it was serious. But it happened anyway.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
abc132
Posts: 2411
Joined: Thu Oct 18, 2018 1:11 am

Re: The piece - Spend Without Worry in Retirement?

Post by abc132 »

afan wrote: Mon Sep 20, 2021 3:15 pm If I were to buy an annuity now to cover living expenses I would be extremely worried about inflation. Assuming that these historically low rates will persist for decades is the definition of whistling past the grave yard.
No one wanted high inflation the last time it was serious. But it happened anyway.
That one is easy.

Put enough stocks into the portfolio to cover inflation.

If you expect stocks and bonds to be below inflation, the answer is simple:

How to become a millionaire? Start out with a billion...

You will work until you can't in such a scenario.
randomguy
Posts: 11285
Joined: Wed Sep 17, 2014 9:00 am

Re: The piece - Spend Without Worry in Retirement?

Post by randomguy »

afan wrote: Mon Sep 20, 2021 3:15 pm If I were to buy an annuity now to cover living expenses I would be extremely worried about inflation. Assuming that these historically low rates will persist for decades is the definition of whistling past the grave yard.
No one wanted high inflation the last time it was serious. But it happened anyway.
Even low inflation adds up. Even over the last 20 years the cumulative effect of inflation is that everything costs 50% more. Over the last 30 years prices have have almost doubled. It is something you need to plan for. People just say annuitize some more money after 10 years and 20 years but the question is always where that money is coming from and how it has performed against inflation....
randomguy
Posts: 11285
Joined: Wed Sep 17, 2014 9:00 am

Re: The piece - Spend Without Worry in Retirement?

Post by randomguy »

abc132 wrote: Mon Sep 20, 2021 1:41 pm
randomguy wrote: Mon Sep 20, 2021 12:51 pm
abc132 wrote: Mon Sep 20, 2021 11:47 am
If I understand my contract correctly, my fixed rate is 4.5% nominal of the balance on the date when I annuitize the contract for joint survivors of the same age. The fixed rate has no inflation adjustment. 4% withdrawal method inflation adjusted will soon be higher than 4.5% nominal, but it is the first few years that matter for sequence of returns risk. This is when you might be comparing 3% when you decide to lower spending in a poor sequence to 4.5% from the annuity.

I agree with you about the younger crowd, but since I have the product already I may as well evaluate liquidating it vs further funding it. Liquidation in a low tax bracket is the most likely choice. If we see changes in tax deferred space, there may be an increase in the use of low cost annuities for additional tax deferred space by those in high income brackets.
4%

The point is that if you are happy with a nominal withdrawal, you aren't taking 4% out of the portfolio. You are taking 5-6% and your money will still last 30 years something like 97% of the time. You get drastically more money with a portfolio than an annuity until you get old enough for mortality credits to add significantly to your return.

Just because things are percents (divident payouts, SS increases, annuity payouts, SWR,....) doesn't mean we can compare them. Let's say our SWR is cut to 3%. Would you prefer that to 4.5% after 10 years of retirement? Do take the 63k (3% real for the 1970 retire) or the 45k? Of course you could have retired in 1930 and be looking at the reverse. Mixing up real and nominal is just misleading.
The fair comparison is what is being done with the assets, and I am not making the type of extrapolation you claim. Compare a stock bond portfolio that withdraws 3% in a poor early sequence to a stock/annuity portfolio. Entirely annuitizing everything is not a general recommendation, so it is an odd assumption to make.

Compare income flooring to annuitize basic needs and a remaining portfolio with a high amount of stocks to a traditional stock/bond portfolio. In some cases the annuity method will win. In some cases it will lose. I recommend doing a calculation before oversimplifying the problem to one preferred answer.
Yes the fair comparison is when you take your money you can do
a) 45k/year for life from the annuity
b) 55k/year for 30 years + dying with a big pile of money 95% of the time from any of the standard retirement portfolios. You take the risk and you get rewarded

Now is there a blended approach were you replace bonds with annuities? There are papers on the subject but they are all borderline and none of them show drastically different results than just holding a portfolio. I am not aware of a single one that looked at what happened to the 1966 retiree who tried this for example. Even in the cases where they push the annuities, you tend to be need to be old (65+, 70 is better) to get it to work out.
abc132
Posts: 2411
Joined: Thu Oct 18, 2018 1:11 am

Re: The piece - Spend Without Worry in Retirement?

Post by abc132 »

randomguy wrote: Mon Sep 20, 2021 3:57 pm
afan wrote: Mon Sep 20, 2021 3:15 pm If I were to buy an annuity now to cover living expenses I would be extremely worried about inflation. Assuming that these historically low rates will persist for decades is the definition of whistling past the grave yard.
No one wanted high inflation the last time it was serious. But it happened anyway.
Even low inflation adds up. Even over the last 20 years the cumulative effect of inflation is that everything costs 50% more. Over the last 30 years prices have have almost doubled. It is something you need to plan for. People just say annuitize some more money after 10 years and 20 years but the question is always where that money is coming from and how it has performed against inflation....
I would assume a company charging 50% more for the same product would have 50% higher sales, and that the overall stock market would increase to recover most of this inflation.

There are 32% more people in the US than 30 years ago, so the index of all US customers is a 32% bigger market.
There are increases in efficiency over time (2-3% per year), so this 32% increase in customers is multiplied either by higher output (1.025^30) per customer or lower cost per customer.

1.32*(1.025)^30*1.50 = 4.05 times the nominal value, which is much more than the inflation of 50%. It makes sense that we expect stocks to beat inflation over long time periods, absent major war or calamity.

An annuity payout increases as life expectancy decreases, so we continue to get a higher percentage of our assets as our life expectancy dwindles.

We would need quite the combination of lower population and lower efficiency to counteract the increasing payout as longevity decreases, along with a failure of the fed mandate to limit long term inflation. I recommend guns and ammo for such a scenario.
whereskyle
Posts: 1911
Joined: Wed Jan 29, 2020 9:29 am

Re: The piece - Spend Without Worry in Retirement?

Post by whereskyle »

KlangFool wrote: Mon Sep 20, 2021 12:07 pm
whereskyle wrote: Mon Sep 20, 2021 11:53 am
ruralavalon wrote: Mon Sep 20, 2021 9:52 am
Escapevelocity wrote: Mon Sep 20, 2021 9:36 am Non-COLA annuities, which represent the vast majority of SPIAs are fundamentally limited in their usefulness. I would have a big problem plunking down a large chunk of my portfolio for non-COLA SPIAs without any sense of confidence around the future buying power of the income stream.
SPIAs with Cost of Living Adjustments (COLAs) are indeed a rapidly vanishing commodity.

I don't have a SPIA, but still think a non-COLA SPIA can be very useful.
Especially where the expenses meant to be covered are fixed, such as a mortgage payment or car payment. Limiting SPIAs to cover expenses such as these might be prudent.
whereskyle,

Why do that instead of paying off the loan?

KlangFool
Good question!
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
abc132
Posts: 2411
Joined: Thu Oct 18, 2018 1:11 am

Re: The piece - Spend Without Worry in Retirement?

Post by abc132 »

randomguy wrote: Mon Sep 20, 2021 4:25 pm
abc132 wrote: Mon Sep 20, 2021 1:41 pm
randomguy wrote: Mon Sep 20, 2021 12:51 pm
abc132 wrote: Mon Sep 20, 2021 11:47 am
If I understand my contract correctly, my fixed rate is 4.5% nominal of the balance on the date when I annuitize the contract for joint survivors of the same age. The fixed rate has no inflation adjustment. 4% withdrawal method inflation adjusted will soon be higher than 4.5% nominal, but it is the first few years that matter for sequence of returns risk. This is when you might be comparing 3% when you decide to lower spending in a poor sequence to 4.5% from the annuity.

I agree with you about the younger crowd, but since I have the product already I may as well evaluate liquidating it vs further funding it. Liquidation in a low tax bracket is the most likely choice. If we see changes in tax deferred space, there may be an increase in the use of low cost annuities for additional tax deferred space by those in high income brackets.
4%

The point is that if you are happy with a nominal withdrawal, you aren't taking 4% out of the portfolio. You are taking 5-6% and your money will still last 30 years something like 97% of the time. You get drastically more money with a portfolio than an annuity until you get old enough for mortality credits to add significantly to your return.

Just because things are percents (divident payouts, SS increases, annuity payouts, SWR,....) doesn't mean we can compare them. Let's say our SWR is cut to 3%. Would you prefer that to 4.5% after 10 years of retirement? Do take the 63k (3% real for the 1970 retire) or the 45k? Of course you could have retired in 1930 and be looking at the reverse. Mixing up real and nominal is just misleading.
The fair comparison is what is being done with the assets, and I am not making the type of extrapolation you claim. Compare a stock bond portfolio that withdraws 3% in a poor early sequence to a stock/annuity portfolio. Entirely annuitizing everything is not a general recommendation, so it is an odd assumption to make.

Compare income flooring to annuitize basic needs and a remaining portfolio with a high amount of stocks to a traditional stock/bond portfolio. In some cases the annuity method will win. In some cases it will lose. I recommend doing a calculation before oversimplifying the problem to one preferred answer.
Yes the fair comparison is when you take your money you can do
a) 45k/year for life from the annuity
b) 55k/year for 30 years + dying with a big pile of money 95% of the time from any of the standard retirement portfolios. You take the risk and you get rewarded

Now is there a blended approach were you replace bonds with annuities? There are papers on the subject but they are all borderline and none of them show drastically different results than just holding a portfolio. I am not aware of a single one that looked at what happened to the 1966 retiree who tried this for example. Even in the cases where they push the annuities, you tend to be need to be old (65+, 70 is better) to get it to work out.
Agreed on the blended approach, and you make some very good points.

I do think those going for 40x+ expenses in a 60/40 allocation with additional cash could be better off with an annuity floor + all stocks, and I would encourage this type of investor to think about a floor of income and letting their stocks grow. Stocks should keep purchasing power for the reasons I stated earlier.

Maybe there is a psychological reason those really risk averse simply won't choose guaranteed income.
59Gibson
Posts: 1386
Joined: Mon Dec 07, 2020 7:41 am

Re: The piece - Spend Without Worry in Retirement?

Post by 59Gibson »

abc132 wrote: Mon Sep 20, 2021 4:51 pm
randomguy wrote: Mon Sep 20, 2021 4:25 pm
abc132 wrote: Mon Sep 20, 2021 1:41 pm
randomguy wrote: Mon Sep 20, 2021 12:51 pm
abc132 wrote: Mon Sep 20, 2021 11:47 am
If I understand my contract correctly, my fixed rate is 4.5% nominal of the balance on the date when I annuitize the contract for joint survivors of the same age. The fixed rate has no inflation adjustment. 4% withdrawal method inflation adjusted will soon be higher than 4.5% nominal, but it is the first few years that matter for sequence of returns risk. This is when you might be comparing 3% when you decide to lower spending in a poor sequence to 4.5% from the annuity.

I agree with you about the younger crowd, but since I have the product already I may as well evaluate liquidating it vs further funding it. Liquidation in a low tax bracket is the most likely choice. If we see changes in tax deferred space, there may be an increase in the use of low cost annuities for additional tax deferred space by those in high income brackets.
4%

The point is that if you are happy with a nominal withdrawal, you aren't taking 4% out of the portfolio. You are taking 5-6% and your money will still last 30 years something like 97% of the time. You get drastically more money with a portfolio than an annuity until you get old enough for mortality credits to add significantly to your return.

Just because things are percents (divident payouts, SS increases, annuity payouts, SWR,....) doesn't mean we can compare them. Let's say our SWR is cut to 3%. Would you prefer that to 4.5% after 10 years of retirement? Do take the 63k (3% real for the 1970 retire) or the 45k? Of course you could have retired in 1930 and be looking at the reverse. Mixing up real and nominal is just misleading.
The fair comparison is what is being done with the assets, and I am not making the type of extrapolation you claim. Compare a stock bond portfolio that withdraws 3% in a poor early sequence to a stock/annuity portfolio. Entirely annuitizing everything is not a general recommendation, so it is an odd assumption to make.

Compare income flooring to annuitize basic needs and a remaining portfolio with a high amount of stocks to a traditional stock/bond portfolio. In some cases the annuity method will win. In some cases it will lose. I recommend doing a calculation before oversimplifying the problem to one preferred answer.
Yes the fair comparison is when you take your money you can do
a) 45k/year for life from the annuity
b) 55k/year for 30 years + dying with a big pile of money 95% of the time from any of the standard retirement portfolios. You take the risk and you get rewarded

Now is there a blended approach were you replace bonds with annuities? There are papers on the subject but they are all borderline and none of them show drastically different results than just holding a portfolio. I am not aware of a single one that looked at what happened to the 1966 retiree who tried this for example. Even in the cases where they push the annuities, you tend to be need to be old (65+, 70 is better) to get it to work out.
Agreed on the blended approach, and you make some very good points.

I do think those going for 40x+ expenses in a 60/40 allocation with additional cash could be better off with an annuity floor + all stocks, and I would encourage this type of investor to think about a floor of income and letting their stocks grow. Stocks should keep purchasing power for the reasons I stated earlier.

Maybe there is a psychological reason those really risk averse simply won't choose guaranteed income.
I like the blended approach, the issue is at what age to pull the trigger on SPIA.. everything I researched seems to be 75 to get adequate mortality credits.
abc132
Posts: 2411
Joined: Thu Oct 18, 2018 1:11 am

Re: The piece - Spend Without Worry in Retirement?

Post by abc132 »

59Gibson wrote: Mon Sep 20, 2021 4:56 pm I like the blended approach, the issue is at what age to pull the trigger on SPIA.. everything I researched seems to be 75 to get adequate mortality credits.
I really wish people could post their situation here and get that type of specific feedback.

I'm out until I figure out my own situation, so thanks for everyone's thoughts.
KlangFool
Posts: 31426
Joined: Sat Oct 11, 2008 12:35 pm

Re: The piece - Spend Without Worry in Retirement?

Post by KlangFool »

abc132 wrote: Mon Sep 20, 2021 4:51 pm
Maybe there is a psychological reason those really risk averse simply won't choose guaranteed income.
abc132,

Or, some of those folks have great flexibility in controlling their annual expense. Their fixed expense is low and they do not need the guaranteed income from annuity.

The correct answer is "it depends".

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
afan
Posts: 8169
Joined: Sun Jul 25, 2010 4:01 pm

Re: The piece - Spend Without Worry in Retirement?

Post by afan »

abc132 wrote: Mon Sep 20, 2021 4:33 pm

I would assume a company charging 50% more for the same product would have 50% higher sales, and that the overall stock market would increase to recover most of this inflation.
Google "Stagflation".
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
afan
Posts: 8169
Joined: Sun Jul 25, 2010 4:01 pm

Re: The piece - Spend Without Worry in Retirement?

Post by afan »

abc132 wrote: Mon Sep 20, 2021 4:51 pm
Maybe there is a psychological reason those really risk averse simply won't choose guaranteed income.
Because they know they have to spend real dollars but annuities only pay nominal dollars. Thus, there is no way to guarantee a real cash flow. Note, that annuities do not pay "income" until one has received back all the principal put in. That can take many years, particularly at current rates. Then one gets back a small amount that would be the growth on a safe fixed income asset. Nowadays, that is a very small amount. Only once one has collected all of both do annuities start paying income. Until then, one is just taking money one already owns out of a checking account.

Even when real annuities were available, the payments were so low that almost no one bought them.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
User avatar
HomerJ
Posts: 21246
Joined: Fri Jun 06, 2008 12:50 pm

Re: The piece - Spend Without Worry in Retirement?

Post by HomerJ »

59Gibson wrote: Mon Sep 20, 2021 4:56 pm I like the blended approach, the issue is at what age to pull the trigger on SPIA.. everything I researched seems to be 75 to get adequate mortality credits.
I think 70-75 is indeed the sweet spot.

If you're still in good shape at 75, I would totally buy a SPIA with a chunk of your money and lock in like 10%-11% payouts.

Yes, for the first 9-10 years they are just returning your own money, but it would be hard for me to spend 11% of my nest egg a year at a healthy 75 because I'd be worried about living to 95 or 100.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
Post Reply