Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

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Marseille07
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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by Marseille07 »

Lawrence of Suburbia wrote: Thu Dec 01, 2022 5:13 pm I guess I meant ironic in the light of Dr. Bernstein's article, which was about the dangers of running out of money in inflationary scenario due to SPIA buying. In the short run, It's given me breathing room.

Now, Dr. Bernstein may well be right over the long term -- I can fully recognize when someone's much smarter and informed than I am! (As are most Bogleheads, I'm thankful for the mass of experience and savvy on display here).

With the current inflation ongoing, my future plans to purchase another small SPIA are on indefinite hold. Go stocks!
Oh I see what you're saying. This is a tricky problem because the impact of buying SPIA is unknowable until much later. I don't think it impacts too much though.

But this might mean that you might consider going slightly more aggressive on the rest of your portfolio now that you have an income stream in the form of SPIA.
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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by secondopinion »

Fremdon Ferndock wrote: Thu Dec 01, 2022 5:16 pm
vineviz wrote: Thu Dec 01, 2022 4:37 pm
nedsaid wrote: Thu Dec 01, 2022 3:31 pm The thing that bugs me about these discussions is the inability to admit that the other person with whom one disagrees has a point. It seems egos get involved here and the rhetoric can get a bit overheated. No solution to the twin problems of dealing with inflation and not exhausting the portfolio in retirement is going to be perfect. There are trade-offs and even the best solutions have flaws. The best we can do is try to hedge against the biggest risks we might face but we can't guard against them all.
When some guru uses terms like "Russian roulette" to describe any investment approach that doesn't 100% adhere to their recommended strategy, I think the discussion was probably overheated before it even began.

In any case, this isn't the first call for a non-dogmatic approach in this thread.
vineviz wrote: Thu Dec 01, 2022 11:18 am Investors should take a holistic and balanced look at the risks they face rather than rely on dogmatic advice from "experts" who don't know their personal situation.
Is inflation a significant risk for many retirees? Absolutely, and if the linked article was merely making that point there'd be a lot of people agreeing with it. Including me. And I've been a frequent advocate for the TIPS ladder that Bernstein is pitching, by the way. Heck, I'm building one for my own portfolio.

But is inflation the only risk that retirees face? Or even the biggest one? Maybe for some retirees, but definitely not for all of them.

And are income annuities so fundamentally flawed that investors should never consider them, as Bernstein seems to have argued? Absolutely not. You've got one group of people arguing that investors should consider SPIAs as part of their retirement plan, and one person writing articles claiming this is akin to playing "Russian roulette".

Which approach do you think best represents your admonition to admit that "(t)here are trade-offs and even the best solutions have flaws"?
Well, just to play Devil's Advocate, what risks are addressed by nominal SPIAs that cannot be addressed otherwise? And how serious are they?
Hopefully, one is being paid much more money than what can be achieved by long-term bonds alone. If they are not planning to leave as much in assets in death and favor using it for your own living, then it is more practical. The annuity issuer does make money on average; but if one is not caring about the assets left on death, then it is kind of a non-concern versus long-term bonds (which either need to draw from principal at a hard to determine amount, or be satisfied with a small coupon to make them work in retirement).
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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by Fremdon Ferndock »

This isn't the first time that Dr. Bernstein has raised the dilemma presented by managing inflation risk vs. longevity risk:
Which is worse, the risk of running out of money with TIPS or the risk of a severe financial crisis or company failure that would crater the annuity income stream? Your guess is as good as mine. A reasonable person has at least three options in this situation: the TIPS ladder, the commercial annuity, or some combination of the two. Best of all would be to completely avoid this dilemma by being able to purchase at age 75 a supplementary 30-year rung that would take them to age 105 or to have the equivalent in risk-free assets to do so.
Bernstein, William J. The Ages of the Investor: A Critical Look at Life-cycle Investing (Investing for Adults Book 1) . Efficient Frontier Publications. Kindle Edition.
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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by garlandwhizzer »

I totally agree with Dr. Bernstein on this one. Nominal returns whether from annuities or long term nominal bonds transfer 100% of inflation risk to the investor who purchases them and reimburses them poorly for that risk IMO. If you have a long time horizon ahead of you, the greatest risk to your fixed income is inflation. If inflation persists at a high and increasing level as it did from 1940 -1980, it produced 4 decades of negative real returns from nominals, loss of purchasing power for 40 years. That's a portfolio killer. Many investors now weren't around then and they totally neglect the possibility that we may be entering a new era where the main future enemy to investors will be inflation.

Nominal returns worked great, too great in fact, from 1982 to 2000. It created a Treasury bubble, especially LTT. Those who signed up for annuities in the zero interest rate world and those who loaded up on LTT when their yields were at or near historic lows have learned the lesson the hard way. LTT have been an ongoing disaster for 2 years with greater losses than equity even INTL equity. Meanwhile TIPS have held their value much better as their yields have increased in line with increasing inflation. Current monthly annuity returns likewise don't go as far as hoped if this inflationary environment doesn't reverse. That's called risk.

Annuities and long term nominal bonds offer the illusion of security in the future. A TIPS ladder and gives you the real thing with or without inflation in real time without significant volatility. Equity and commodity exposure give some long term protection from inflation but are volatile. I think that all fixed income portfolios should have significant TIPS exposure or substantial STT/MMF for purposes of fixed income price stability in an inflationary environment. I also believe the average bond duration should be no longer than intermediate term. That's just my point of view and it has worked for me. It's fine with me if others see it differently.

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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by Taylor Larimore »

Lawrence of Suburbia wrote: Thu Dec 01, 2022 5:13 pm
With the current inflation ongoing, my future plans to purchase another small SPIA are on indefinite hold.
Go stocks!
Lawrence of Suburbia:

I believe inflation affects a stock portfolio just as much as it affects a SPIA annuity. I would be interested learning why anyone disagrees.

Thank you and best wishes.
Taylor
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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by NPT »

garlandwhizzer wrote: Thu Dec 01, 2022 6:35 pm I totally agree with Dr. Bernstein on this one. (...)
Perhaps a less provocative title would have been better, but I also very much agree. :thumbsup

Unless I have a future nominal liability (mortgage?) I would like to offset, there is no situation in which I would lend money for longer than just a few years at most in exchange for nominal payments, because I simply do not know what a nominal amount of currency will be worth. It is not just that my estimates may be slightly inaccurate, it is that they could be completely off the mark by a huge amount, if inflation turns out to be higher than expected for an extended period of time (essentially, negative compound interest working against me).

I am aware that some financial theories suggest otherwise, but if a theory tells me to jump off a bridge, first I will check my calculations, and then I will do some very serious soul-searching about the underlying assumptions. It is vastly more likely that a mistake was made somewhere, such as some important aspect of the messy real world getting ignored in a simplified model, than that some truth has been discovered that is so counterintuitive that it seems nuts.

Just my 2¢... :happy
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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by Vulcan »

Taylor Larimore wrote: Thu Dec 01, 2022 7:01 pm
Lawrence of Suburbia wrote: Thu Dec 01, 2022 5:13 pm
With the current inflation ongoing, my future plans to purchase another small SPIA are on indefinite hold.
Go stocks!
Lawrence of Suburbia:

I believe inflation affects a stock portfolio just as much as it affects a SPIA annuity. I would be interested learning why anyone disagrees.
Because companies are real assets.

Debt is paper.
If you torture the data long enough, it will confess to anything. ~Ronald Coase
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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by vineviz »

garlandwhizzer wrote: Thu Dec 01, 2022 6:35 pm
Annuities and long term nominal bonds offer the illusion of security in the future. A TIPS ladder and gives you the real thing with or without inflation in real time without significant volatility.
As is often the case, simplistic analyses are generally flawed.

Income annuities, nominal bonds, and TIPS each offer “real” security but along different dimensions of risk.

Bernstein has made the error of focusing obsess on one dimension of risk. There’s no need for others to make the same error.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by Northern Flicker »

I think the duration of a SPIA tends to be overestimated by a significant amount when inflation risk is estimated. A SPIA bought by a 70-year-old is an intermediate-duration fixed income asset, not a long duration one.
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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by Taylor Larimore »

Vulcan wrote: Thu Dec 01, 2022 7:06 pm
Taylor Larimore wrote: Thu Dec 01, 2022 7:01 pm
Lawrence of Suburbia wrote: Thu Dec 01, 2022 5:13 pm
With the current inflation ongoing, my future plans to purchase another small SPIA are on indefinite hold.
Go stocks!
Lawrence of Suburbia:

I believe inflation affects a stock portfolio just as much as it affects a SPIA annuity. I would be interested learning why anyone disagrees.
Because companies are real assets.

Debt is paper.
Vulcan:

The value of stocks, bonds and annuities are each represented by paper backed with real assets. All three are affected by inflation.

Taylor
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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by Lawrence of Suburbia »

Taylor Larimore wrote: Thu Dec 01, 2022 7:01 pm
Lawrence of Suburbia wrote: Thu Dec 01, 2022 5:13 pm
With the current inflation ongoing, my future plans to purchase another small SPIA are on indefinite hold.
Go stocks!
Lawrence of Suburbia:

I believe inflation affects a stock portfolio just as much as it affects a SPIA annuity. I would be interested learning why anyone disagrees.

Thank you and best wishes.
Taylor
Are you speaking of COLA'd SPIAs, or regular nominal ones?
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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by vineviz »

Lawrence of Suburbia wrote: Thu Dec 01, 2022 7:46 pm
Taylor Larimore wrote: Thu Dec 01, 2022 7:01 pm
Lawrence of Suburbia wrote: Thu Dec 01, 2022 5:13 pm
With the current inflation ongoing, my future plans to purchase another small SPIA are on indefinite hold.
Go stocks!
Lawrence of Suburbia:

I believe inflation affects a stock portfolio just as much as it affects a SPIA annuity. I would be interested learning why anyone disagrees.

Thank you and best wishes.
Taylor
Are you speaking of COLA'd SPIAs, or regular nominal ones?
All currently available SPIAs are nominal. A fixed COLA doesn’t change that.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by nedsaid »

vineviz wrote: Thu Dec 01, 2022 4:37 pm
nedsaid wrote: Thu Dec 01, 2022 3:31 pm The thing that bugs me about these discussions is the inability to admit that the other person with whom one disagrees has a point. It seems egos get involved here and the rhetoric can get a bit overheated. No solution to the twin problems of dealing with inflation and not exhausting the portfolio in retirement is going to be perfect. There are trade-offs and even the best solutions have flaws. The best we can do is try to hedge against the biggest risks we might face but we can't guard against them all.
When some guru uses terms like "Russian roulette" to describe any investment approach that doesn't 100% adhere to their recommended strategy, I think the discussion was probably overheated before it even began.

In any case, this isn't the first call for a non-dogmatic approach in this thread.
vineviz wrote: Thu Dec 01, 2022 11:18 am Investors should take a holistic and balanced look at the risks they face rather than rely on dogmatic advice from "experts" who don't know their personal situation.
Is inflation a significant risk for many retirees? Absolutely, and if the linked article was merely making that point there'd be a lot of people agreeing with it. Including me. And I've been a frequent advocate for the TIPS ladder that Bernstein is pitching, by the way. Heck, I'm building one for my own portfolio.

But is inflation the only risk that retirees face? Or even the biggest one? Maybe for some retirees, but definitely not for all of them.

And are income annuities so fundamentally flawed that investors should never consider them, as Bernstein seems to have argued? Absolutely not. You've got one group of people arguing that investors should consider SPIAs as part of their retirement plan, and one person writing articles claiming this is akin to playing "Russian roulette".

Which approach do you think best represents your admonition to admit that "(t)here are trade-offs and even the best solutions have flaws"?
I have been thinking about sustainable withdrawal strategies for about a decade now. Things like annuitizing a portion of the nest egg, a bucket approach to liability matching, buying individual TIPS, 3.5% withdrawal rate, etc. I always felt that I would have to craft such a strategy to fit the circumstances at the time of retirement. Just too many variables to set upon a plan years before the event.

We are experiencing higher rates of inflation and this effects, of course, Single Premium Immediate Annuities. But higher inflation rates have also hurt my Stocks, my Bonds, a couple small pension plans I am vested in, my liquid emergency savings, pretty much everything. So just because my portfolio is down, should someone say that I am playing a dangerous game with the markets? The inflation rate is affecting the purchasing power from my earnings from my job, am I playing a dangerous game by being in the workforce?

How quickly things change! I remember when my portfolio was at all-time highs and when TIPS had negative real yields. That wasn't all that long ago. Where were all the articles back then that TIPS ladders were the only answer to inflation? What happens if inflation and interest rates drop, our portfolios rise to new all-time heights, and real yields on TIPS go negative again? Will there be an article from the same author telling people not to bother with TIPS ladders if they don't already have one constructed?

The truth is that the economy and the markets are dynamic. We have to be resigned to the fact that we will need some flexibility during our retirements which might include adjusting our withdrawal rates.

Another thing that Bobcat2 pointed out so well in another thread is that inflation protection is expensive, something that others have glossed over in these discussions. Bob pointed out that TIPS ladders are more expensive than annuities with annual increases which are more expensive than annuities with no annual increases in payouts. So that is another consideration.

I just think of annuities, TIPS ladders, Buckets, strategies to take withdrawals from Stocks in good markets and from Bonds in bad, and other vehicles and strategies as tools in the toolbox. When the time comes, I will have to decide which of those tools to use.
Last edited by nedsaid on Fri Dec 02, 2022 12:32 pm, edited 1 time in total.
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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by mmse »

Taylor Larimore wrote: Thu Dec 01, 2022 7:20 pm
Vulcan wrote: Thu Dec 01, 2022 7:06 pm
Taylor Larimore wrote: Thu Dec 01, 2022 7:01 pm
Lawrence of Suburbia wrote: Thu Dec 01, 2022 5:13 pm
With the current inflation ongoing, my future plans to purchase another small SPIA are on indefinite hold.
Go stocks!
Lawrence of Suburbia:

I believe inflation affects a stock portfolio just as much as it affects a SPIA annuity. I would be interested learning why anyone disagrees.
Because companies are real assets.

Debt is paper.
Vulcan:

The value of stocks, bonds and annuities are each represented by paper backed with real assets. All three are affected by inflation.

Taylor
I am not Vulcan, but please allow me to comment on this one.

Stock represents a share of ownership of the assets of the company (less liabilities), while a nominal bond is only a claim on a stream of payments in nominal dollars. Even if the bond issuer has assets, his obligation to the bond holder is limited to the nominal terms of the bond. Stock does not have such limitation.

This may be the basis to the belief that stocks provide inflation protection in the long-run, e.g. "Unconventional Success" David Swensen (Core Asset Classes / Domestic Equity).
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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by itsmeagain »

NiceUnparticularMan wrote: Thu Dec 01, 2022 5:17 pm Yeah, self-insuring against longevity is obviously an option for sufficiently wealthy people.

However, I would point out one of the downsides of that approach is the likelihood of passing away with a large estate. This is not necessarily seen as the worst thing that can happen, but I think in many cases one might suggest both the investor and their beneficiaries could have been better off if the investor had given away more of that wealth while they were alive.

So that to me is an intriguing, somewhat subtle argument for annuities--that if used judiciously, you might be able to give more of your wealth away while alive.

Including, for that matter, out of the income from your annuity.
This!^^^ (bold added)
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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by Fremdon Ferndock »

vineviz wrote: Thu Dec 01, 2022 7:13 pm
garlandwhizzer wrote: Thu Dec 01, 2022 6:35 pm
Annuities and long term nominal bonds offer the illusion of security in the future. A TIPS ladder and gives you the real thing with or without inflation in real time without significant volatility.
As is often the case, simplistic analyses are generally flawed.

Income annuities, nominal bonds, and TIPS each offer “real” security but along different dimensions of risk.

Bernstein has made the error of focusing obsess on one dimension of risk. There’s no need for others to make the same error.
Each different "asset" also comes bundled with it's own risks, which should also be considered. For example, nominal annuities come bundled with inflation risk and the risk of default by insurance carriers as pointed out by Bernstein. They also carry the risk that some portion of your investment could be lost to beneficiaries. TIPs don't carry those risks. On the other hand, a TIPs ladder carries longevity risk if it doesn't have enough rungs. It's not merely a matter of risk diversification -- it's a matter of which risks you want to mitigate and whether they can be mitigated. As Bernstein points out, you can always add more rungs to your TIPs ladder to manage longevity risk. Not much you can do to mitigate the most significant risks of nominal annuities.
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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by nedsaid »

itsmeagain wrote: Thu Dec 01, 2022 8:37 pm
NiceUnparticularMan wrote: Thu Dec 01, 2022 5:17 pm Yeah, self-insuring against longevity is obviously an option for sufficiently wealthy people.

However, I would point out one of the downsides of that approach is the likelihood of passing away with a large estate. This is not necessarily seen as the worst thing that can happen, but I think in many cases one might suggest both the investor and their beneficiaries could have been better off if the investor had given away more of that wealth while they were alive.

So that to me is an intriguing, somewhat subtle argument for annuities--that if used judiciously, you might be able to give more of your wealth away while alive.

Including, for that matter, out of the income from your annuity.
This!^^^ (bold added)
Taylor Larimore and his late wife did precisely this. He has several posts on this topic.
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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by Vulcan »

Taylor Larimore wrote: Thu Dec 01, 2022 7:20 pm
Vulcan wrote: Thu Dec 01, 2022 7:06 pm
Taylor Larimore wrote: Thu Dec 01, 2022 7:01 pm
Lawrence of Suburbia wrote: Thu Dec 01, 2022 5:13 pm
With the current inflation ongoing, my future plans to purchase another small SPIA are on indefinite hold.
Go stocks!
Lawrence of Suburbia:

I believe inflation affects a stock portfolio just as much as it affects a SPIA annuity. I would be interested learning why anyone disagrees.
Because companies are real assets.

Debt is paper.
Vulcan:

The value of stocks, bonds and annuities are each represented by paper backed with real assets. All three are affected by inflation.

Taylor
But isn't nominal annuity affected by inflation in a more direct, irreparable way than, say, a factory?

A nominal annuity (or bond) is basically a stack of cash. Once inflation takes a bite out of it, you're never seeing that bite again.

I lived through years of hyperinflation.

I distrust cash.
If you torture the data long enough, it will confess to anything. ~Ronald Coase
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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by Vulcan »

mmse wrote: Thu Dec 01, 2022 8:08 pm I am not Vulcan, but please allow me to comment on this one.

Stock represents a share of ownership of the assets of the company (less liabilities), while a nominal bond is only a claim on a stream of payments in nominal dollars. Even if the bond issuer has assets, his obligation to the bond holder is limited to the nominal terms of the bond. Stock does not have such limitation.

This may be the basis to the belief that stocks provide inflation protection in the long-run, e.g. "Unconventional Success" David Swensen (Core Asset Classes / Domestic Equity).
Exactly.
Cash is paper.
Thus, nominal bonds and annuities are also paper.
Last edited by Vulcan on Thu Dec 01, 2022 10:12 pm, edited 2 times in total.
If you torture the data long enough, it will confess to anything. ~Ronald Coase
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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by 2pedals »

nedsaid wrote: Thu Dec 01, 2022 8:07 pm Another thing that Bobcat2 pointed out so well in another thread is that inflation protection is expensive, something that others have glossed over in these discussions. Bob pointed out that TIPS ladders are more expensive than annuities with annual increases which are more expensive than annuities with no annual increases in payouts. So that is another consideration.
Bobcat2 is correct to point out that inflation protection is expensive, this gets overlooked too frequently. Even when COLA-based SPIA annuities were available they were much more expensive than nominal SPIA. Not too many folks were willing to purchase them and only a few companies were not willing to sell them. I don't believe TIPS provides enough protection that many people need. Placing your money in TIPS only protects that money that is invested in TIPS, although equity funds can beat inflation it is not inflation protection. Then again whatever you place in TIPS gets removed from the risk portion of the portfolio and equity funds may (expected by many) have much better returns in the long run.
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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by Random Musings »

I side more with Bernstein's approach on this, although I think his title is a bit too much. The real Russian Roulette is being played by the majority of our citizens having minimal or no savings during retirement. When inflation is higher as it is today or in the 70's, the lag in monthly SS adjustments to inflation starts to really impact spending for basic needs. For most retired people on this board, more pronounced inflation may impact the ability to reach out and purchase some of the wants.

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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

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The single most important factor that determines how to do that is the nest-egg burn rate (your annual spending divided by the size of your retirement portfolio). I suggest the following rule of thumb: if your burn rate is below 2% at age 60, below 3% at age 70, or below 4% at age 80, a standard stock/bond portfolio will nicely see you through your retirement, and you have no need to annuitize your assets.

He is a great coach for richest person in the graveyard contests.
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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by McQ »

Fremdon Ferndock wrote: Thu Dec 01, 2022 10:33 am At retirement at age 65 men have an average life expectancy of 18 years and for women it is 20 years. There's less than a 10% probability that a 65-year old male will live 30 years and just over 10% that a 65-year old female will. For a couple, there's an 18% chance that one of them will live 30 years, but less than a 1% chance that both of them will.

...
Fremdon Ferndock, you are the latest target of my ongoing quest to improve the mortality statistics in use at Bogleheads (3rd of nn expected attempts … it is difficult to turn the battleship).

I believe you have used Social Security or CDC data for these numbers, i.e., general population data, which perforce includes many tobacco-using, transfat-consuming, nn hours of daily tv viewing, BMI > 30, <500 steps per day individuals.

That is not the population that insurers consider when pricing life annuities. Insurers ask, “what kind of individual would possibly be willing to hand over a large sum of money for a series of payments that will end precisely at death?” Hmm, probably someone with private knowledge that makes them willing to bet on a long life. Like maybe a healthy-living, well-educated, well-informed, careful, conscientious individual … a Boglehead! We’d better bump up that general population life expectancy when pricing our annuities.

Fortunately, there is an easy source on the web for so-called “annuitant mortality” statistics. The IRS is compelled by statute to find and use this data in setting RMDs. Bogleheads can find it here: https://www.federalregister.gov/documen ... ng-minimum

Caveat: by law the IRS must use unisex mortality. Insurers are not bound that way.

2nd caveat: Life expectancy is an arithmetic average of a geometric series. For the ages under consideration, about 55% of annuitants will still be alive at LE (i.e., median age of survival > LE).

Redoing your numbers per the IRS tables:
1. A unisex individual age 65 has a life expectancy of 22.9 years
2. A unisex 65-year-old couple has a life expectancy for the second to die of 28 years.
a. There is a 40% probability that one member of such a couple will still be alive in 30 years; 14% after 35 years; 2.35% after 40 years; 0.2% after 45 years.

Returning to this thread: from the IRS tables, it follows that a couple in their mid-60s has a substantial probability of outliving the longest TIPS ladder they can assemble (30 years).

A couple age 70 has a smaller probability of outliving that TIPS ladder—about 14%

A couple age 80 faces a negligible probability that one will still be alive after 30 years (~0.2%) [but I pity the poor insurance company who bet against Taylor].

Returning to the mid-60s couple, who might need to consider an annuity: post-Depression (post gold-standard), the lowest 30-year inflation rate ever recorded in US history was 2.24% (November 2020). The lowest 40-year rate was 2.74% (September 2021). The first turns one dollar of annuity payments into 51 cents of spending power over the interval; the second turns one dollar into 34 cents. That’s the spending power you can lock in at later ages if a TIPS ladder isn’t good enough for you … in the best case! (the worst 30- and 40- year inflation rates in the US since the gold standard were 5.41% and 4.71% respectively; I’ll let you do the math on spending power).

For grins, and a useful perspective on life annuities not adjusted for inflation: enter Struldbrugg into your favorite search engine.
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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by Northern Flicker »

A portfolio of rolling commodities futures can be combined with nominal treasuries to simulate TIPS:

https://www.portfoliovisualizer.com/bac ... tion4_3=25

A similar strategy could be used with a nominal SPIA.
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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by Northern Flicker »

McQ wrote: Returning to the mid-60s couple, who might need to consider an annuity: post-Depression (post gold-standard), the lowest 30-year inflation rate ever recorded in US history was 2.24% (November 2020). The lowest 40-year rate was 2.74% (September 2021). The first turns one dollar of annuity payments into 51 cents of spending power over the interval; the second turns one dollar into 34 cents. That’s the spending power you can lock in at later ages if a TIPS ladder isn’t good enough for you … in the best case!
This is assuming that the consumption of a retiree grows at the same rate as CPI. It generally doesn't. A retiree spends more on travel, entertainment, and other discretionary expenses early in retirement than later in retirement.

Unpredictable expenses such as long-term care are typically a much larger source of spending variance than the effect of inflation on a retiree's household budget.

Hyperinflation risk is a different kettle of fish and protection from it requires specific risk planning, but it also leads to social instability with uncertain outcomes. There are no guaranteed protections from it as a result.
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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by Grt2bOutdoors »

mmse wrote: Thu Dec 01, 2022 8:08 pm
Taylor Larimore wrote: Thu Dec 01, 2022 7:20 pm
Vulcan wrote: Thu Dec 01, 2022 7:06 pm
Taylor Larimore wrote: Thu Dec 01, 2022 7:01 pm
Lawrence of Suburbia wrote: Thu Dec 01, 2022 5:13 pm
With the current inflation ongoing, my future plans to purchase another small SPIA are on indefinite hold.
Go stocks!
Lawrence of Suburbia:

I believe inflation affects a stock portfolio just as much as it affects a SPIA annuity. I would be interested learning why anyone disagrees.
Because companies are real assets.

Debt is paper.
Vulcan:

The value of stocks, bonds and annuities are each represented by paper backed with real assets. All three are affected by inflation.

Taylor
I am not Vulcan, but please allow me to comment on this one.

Stock represents a share of ownership of the assets of the company (less liabilities), while a nominal bond is only a claim on a stream of payments in nominal dollars. Even if the bond issuer has assets, his obligation to the bond holder is limited to the nominal terms of the bond. Stock does not have such limitation.

This may be the basis to the belief that stocks provide inflation protection in the long-run, e.g. "Unconventional Success" David Swensen (Core Asset Classes / Domestic Equity).
There is no guarantee that company assets will be worth more in real or nominal terms during bouts of high inflation. Assets are only worth more when there are willing buyers able to pay more. The cost of funding plays an important and often overlooked role by equity holders to their detriment. Assets are worth less to the buyer when there are less sales, lower profit margins and stiffer operating environments. Equities are a call option on current and future earnings potential - an inflationary environment may lead to higher nominal sales or less, but the higher operating costs lead to lower, not higher profits. Meanwhile inflation continues to erode the value of those assets.

An annuity or a bond is a contractual right to receive a stream of payments for a set period of time. The value of which is often understated as we see from these continual debates on equities vs. bonds. Most retirees are not looking for the maximization of terminal wealth, they are though looking for a know stream of payments. There is no perfect in portfolio design, there is good enough, but perfect?
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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by Northern Flicker »

Another strategy available to married couples for dealing with inflation with a nominal SPIA is to have a 100% survivorship benefit. The surviving spouse then has the same benefit to cover reduced expenses. This does not offer much if anything if both live well past their age at life expectancy at the time the SPIA is purchased.
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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by JayB »

Northern Flicker wrote: Fri Dec 02, 2022 12:17 am This is assuming that the consumption of a retiree grows at the same rate as CPI. It generally doesn't.
...
Unpredictable expenses such as long-term care are typically a much larger source of spending variance than the effect of inflation on a retiree's household budget.
While it is useful to project expenses out 20 or 30+ years into retirement, I think that many investors place far too much confidence in their own projections; they become almost complacent or euphoric once they have supposedly defeased 30 years of expenses with a TIPS ladder, for instance. Many retirees' expenses will not follow the CPI and 30-year approaches such as TIPS ladders or SWRs don't incorporate large unexpected expenses such as costly medical care and/or extended LTC beyond any policy limits. Medical out-of-pocket cost inflation typically exceeds the CPI, so the proportion of one's budget needed for health care will tend to grow as one ages. On top of that, utilization of health care services can also be expected to increase with age, especially in late retirement years.
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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by hudson »

MnD wrote: Thu Dec 01, 2022 10:38 pm The single most important factor that determines how to do that is the nest-egg burn rate (your annual spending divided by the size of your retirement portfolio). I suggest the following rule of thumb: if your burn rate is below 2% at age 60, below 3% at age 70, or below 4% at age 80, a standard stock/bond portfolio will nicely see you through your retirement, and you have no need to annuitize your assets.

He is a great coach for richest person in the graveyard contests.
That works for me.
If one has a low nest-egg burn rate, a SPIA probably isn't needed.
Or if one lives off of social security and a pension, a SPIA may not be called for.
For fixed income, I like half TIPS and half nominals...or maybe even 70% TIPS and 30% nominals.

Bottom Line: TIPS for inflation protection and nominals for guaranteed income...all somewhat duration matched.



I guess the quote is by W. Bernstein?
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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by vineviz »

hudson wrote: Fri Dec 02, 2022 8:21 am
MnD wrote: Thu Dec 01, 2022 10:38 pm The single most important factor that determines how to do that is the nest-egg burn rate (your annual spending divided by the size of your retirement portfolio). I suggest the following rule of thumb: if your burn rate is below 2% at age 60, below 3% at age 70, or below 4% at age 80, a standard stock/bond portfolio will nicely see you through your retirement, and you have no need to annuitize your assets.

He is a great coach for richest person in the graveyard contests.
That works for me.
If one has a low nest-egg burn rate, a SPIA probably isn't needed.
Or if one lives off of social security and a pension, a SPIA may not be called for.
For fixed income, I like half TIPS and half nominals...or maybe even 70% TIPS and 30% nominals.

Bottom Line: TIPS for inflation protection and nominals for guaranteed income...all somewhat duration matched.
Keep in mind that a SPIA is the ultimate expression of a duration-matched nominal fixed income portfolio
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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by bobcat2 »

nedsaid wrote: Thu Dec 01, 2022 8:07 pmAnother thing that Bobcat2 pointed out so well in another thread is that inflation protection is expensive, ... .
I did not point out that inflation protection is expensive. What I did point out was that bond ladders are expensive, if the goal is lifetime income. Getting to keep assets in the estate after you die is costly. Putting it another way, the mortality credit embedded in life annuities is large.

I compared TIPS ladders to graded life annuities. Even graded life annuities that increased at 4% per year were much cheaper than 30 year TIPS ladders.

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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by Fremdon Ferndock »

Of course, the advantage of a SPIA over a nominal bond ladder is that the payout is much higher for a given amount invested due to mortality risk pooling. Purchasing a bond ladder does not afford that benefit. However, to be a fairer comparison, the SPIA payout should be determined with a 100% survivor benefit since a bond ladder would provide that. Once again, the cost of retaining assets in one's estate.
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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by nedsaid »

bobcat2 wrote: Fri Dec 02, 2022 10:45 am
nedsaid wrote: Thu Dec 01, 2022 8:07 pmAnother thing that Bobcat2 pointed out so well in another thread is that inflation protection is expensive, ... .
I did not point out that inflation protection is expensive. What I did point out was that bond ladders are expensive, if the goal is lifetime income. Getting to keep assets in the estate after you die is costly. Putting it another way, the mortality credit embedded in life annuities is large.

I compared TIPS ladders to graded life annuities. Even graded life annuities that increased at 4% per year were much cheaper than 30 year TIPS ladders.

BobK aka Bobcat2
Well, is inflation protection expensive or is it not expensive? There was quite a loss of income upfront for those who bought CPI adjusted annuities and it took years for the monthly payments of the inflation protected annuity to catch up with the monthly payments of the nominal annuity. That is why Wade Pfau was not crazy about them. Of course, those type of annuities are no longer available. So you went from about a 6.5% to 7% payout rate to 4%, which was the sustainable withdrawal rate from a portfolio recommended by the Trinity study. My gosh, if that isn't expensive, I don't know what is.

You did a great job of comparing the TIPS ladders with the graded annuities and I was lending support to your post.

The CPI adjusted annuities were a great product that few would buy.

It wasn't my intent to put words into your mouth but I thought my comment was in the spirit of what you were saying. It is a pretty good illustration of the trade-offs I was talking about. I should have added "if the goal is lifetime income." Precision in language is important in these discussions.
Last edited by nedsaid on Fri Dec 02, 2022 12:22 pm, edited 1 time in total.
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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by Fremdon Ferndock »

bobcat2 wrote: Fri Dec 02, 2022 10:45 am
nedsaid wrote: Thu Dec 01, 2022 8:07 pmAnother thing that Bobcat2 pointed out so well in another thread is that inflation protection is expensive, ... .
I did not point out that inflation protection is expensive. What I did point out was that bond ladders are expensive, if the goal is lifetime income. Getting to keep assets in the estate after you die is costly. Putting it another way, the mortality credit embedded in life annuities is large.

I compared TIPS ladders to graded life annuities. Even graded life annuities that increased at 4% per year were much cheaper than 30 year TIPS ladders.

BobK aka Bobcat2
That was true when the beginning payout for the graded annuity and TIPs ladder were the same, I presume?
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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by Northern Flicker »

bobcat2 wrote: Fri Dec 02, 2022 10:45 am I did not point out that inflation protection is expensive. What I did point out was that bond ladders are expensive, if the goal is lifetime income. Getting to keep assets in the estate after you die is costly. Putting it another way, the mortality credit embedded in life annuities is large.
Putting it even another way, with a SPIA, you fund out to the age of life expectancy. The present value cost of the income stream is hedged at a known amount. With a bond ladder, the actual cost realized is outcome-driven and the retiree has to overfund the income stream. The SPIA retains control over how the expected excess will be invested, instead of being committed to overfunding a bond ladder.

A TIPS ladder may be used to fund a delay in annuitization, reducing the number of years to which the SPIA is exposed to inflation. This also means funding more years because conditional life expectancy conditioned on already having attained a given age increases as age increases.
Last edited by Northern Flicker on Fri Dec 02, 2022 12:23 pm, edited 2 times in total.
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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by bobcat2 »

Fremdon Ferndock wrote: Fri Dec 02, 2022 10:46 am Of course, the advantage of a SPIA over a nominal bond ladder is that the payout is much higher for a given amount invested due to mortality risk pooling. Purchasing a bond ladder does not afford that benefit. However, to be a fairer comparison, the SPIA payout should be determined with a 100% survivor benefit since a bond ladder would provide that. Once again, the cost of retaining assets in one's estate.
Not if the goal is income while you are alive. One has to decide; do I want higher income while I am alive or lower income while alive and a higher estate value once I'm dead? It's a choice.

A reasonable choice for survivorship would be to purchase 3 graded life annuities at say 3% or 4%. Each spouse gets a graded life annuity with 3/8s of the total purchase cost of the annuities. The remaining 1/4 of the total cost of the annuities is a joint last to die annuity. So the last to die gets 5/8s of the annuity income of the total annuity income when both were alive. The joint last to die annuity is covering the loss of the economy of shared living expenses when both were alive and thereby keeping the survivor's standard of living constant.

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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by Taylor Larimore »

Bogleheads:

When I was licenced to sell annuities I learned one very important fact:

"A Single Premium Immediate Annuity (SPIA) provides the highest guaranteed lifetime income of any investment."

I am 98 years old and my two SPIA annuity checks continue to arrive every month!! Looking back, our two SPIAs are the best financial investments we ever made.

Another little known advantage of a lifetime annuity: With our income assured, we were able to give our heirs their inheritance while we are still alive.

Another great advantage: Peace of Mind knowing we will never run out of money!

Best wishes
Taylor
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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by bobcat2 »

Fremdon Ferndock wrote: Fri Dec 02, 2022 11:03 am
bobcat2 wrote: Fri Dec 02, 2022 10:45 am I did not point out that inflation protection is expensive. What I did point out was that bond ladders are expensive, if the goal is lifetime income. Getting to keep assets in the estate after you die is costly. Putting it another way, the mortality credit embedded in life annuities is large.

I compared TIPS ladders to graded life annuities. Even graded life annuities that increased at 4% per year were much cheaper than 30 year TIPS ladders.
That was true when the beginning payout for the graded annuity and TIPs ladder were the same, I presume?
Yes.
TIPS ladders are expensive. Roth's 30 year TIPS ladder paying out $4,300 real per year cost $99,650. A graded life annuity for a 65 year old male that also pays out $4,300 in the first year with a 3% increase every year costs $70,997. The quote is from Penn Mutual. Graded at 4% increase every year costs $78,700.
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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by vineviz »

nedsaid wrote: Fri Dec 02, 2022 11:00 am
Well, is inflation protection expensive or is it not expensive? There was quite a loss of income upfront for those who bought CPI adjusted annuities and it took years for the monthly payments of the inflation protected annuity to catch up with the monthly payments of the nominal annuity.
Inflation protection is, broadly speaking, NOT expensive.

The difference in expected return between nominal Treasuries and TIPS is almost always minimal now that the market is mature, and doesn't even have a consistent sign.

When they were available, CPI-linked income annuities had lower initial payouts but that wasn't because the "inflation protection" was expensive. It was because the payouts were expected to increase over the lifetime of the annuitant. Purchasers of CPI-linked annuities were willing to accept a lower payout at age 65, for instance, because they were confident of receiving a BIGGER payout at age 80 based on the rate of expected inflation at the time.
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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by NiceUnparticularMan »

When talking about stocks (or really any asset) and inflation, I think it is really critical to distinguish both expected inflation and unexpected inflation, and short-term versus long-term periods.

Long-term nominal assets, including nominal SPIAs, are priced in part based on long-term expected inflation. I believe it is still possible to get SPIAs with what they call "cost of living adjustments", meaning the payments go up a fixed amount every year. Assuming that belief is right, if those predetermined COLAs were around expected inflation, your SPIA might work out fine--as long as inflation was as expected.

The thing that particularly concerns me, though, is unexpected inflation. And in particular, I am concerned about long-term unexpected inflation. Because that could really cause long-term nominal assets, including nominal SPIAs with such fixed COLAs, to dramatically underperform expectations.

The reason stocks are a better bet for this problem is basically just the assumption that over long periods, on average those companies' operating profit margins will not be too sensitive to inflation rates, such that their nominal profits will go up if inflation is unexpectedly high (and of course down if inflation is unexpectedly low), such that their real earnings will stay around expected, at least on average.

And there is at least some reason to believe that is a decent bet. But with lots of caveats.

First, unexpectedly high inflation can still be associated with lots of adverse stock dynamics in the short term.

Second, this logic works best if you are very, very diversified. Including outside your own main currency zone.

Still, that's the main idea. You can't expect stock returns to track unexpectedly high inflation neatly in the near future. You can at least reasonably hope that earnings will at least mostly, on average, track unexpectedly high inflation higher over the long run.

In contrast, with any long-term nominal asset, there is of course no hope at all it will react in any positive way to unexpectedly high inflation. You simply know for a fact that means bad things for your real returns on that asset over that term.
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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by nedsaid »

vineviz wrote: Fri Dec 02, 2022 12:03 pm
nedsaid wrote: Fri Dec 02, 2022 11:00 am
Well, is inflation protection expensive or is it not expensive? There was quite a loss of income upfront for those who bought CPI adjusted annuities and it took years for the monthly payments of the inflation protected annuity to catch up with the monthly payments of the nominal annuity.
Inflation protection is, broadly speaking, NOT expensive.

The difference in expected return between nominal Treasuries and TIPS is almost always minimal now that the market is mature, and doesn't even have a consistent sign.

When they were available, CPI-linked income annuities had lower initial payouts but that wasn't because the "inflation protection" was expensive. It was because the payouts were expected to increase over the lifetime of the annuitant. Purchasers of CPI-linked annuities were willing to accept a lower payout at age 65, for instance, because they were confident of receiving a BIGGER payout at age 80 based on the rate of expected inflation at the time.
I should have added the qualifier "when guaranteeing lifetime income." Thanks for the clarification.
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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by Northern Flicker »

When CPI-adjusted SPIAs were first available, the reduction in initial payout rate was 30%, but that reduction rose to about 45%, which made them unpopular. Whether or not a hypothetical inflation-adjusted SPIA is expensive would be based on whether the reduction in initial payout is fair value for the net present value of the inflation risk.
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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by bobcat2 »

nedsaid wrote: Fri Dec 02, 2022 11:00 amWell, is inflation protection expensive or is it not expensive? There was quite a loss of income upfront for those who bought CPI adjusted annuities and it took years for the monthly payments of the inflation protected annuity to catch up with the monthly payments of the nominal annuity.
Hi Nedsaid, I didn't mean to offend, but the point I was trying to make in that post was that annuitization is much less costly than bond ladders, if the goal is simply income.

With regard to the expense of inflation protection, I observed that when CPI adjusted (full COLA) life annuities were available, their price was roughly the same as a graded life annuity, where the graded life annuity annual escalation rate was about 50 basis points above the 20 year breakeven inflation rate. Of course, that regularity I observed was when inflation was quite low. If CPI adjusted annuities were currently available that regularity might not hold in today's much higher inflation environment.

BobK
Last edited by bobcat2 on Fri Dec 02, 2022 12:20 pm, edited 2 times in total.
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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by nedsaid »

NiceUnparticularMan wrote: Fri Dec 02, 2022 12:07 pm When talking about stocks (or really any asset) and inflation, I think it is really critical to distinguish both expected inflation and unexpected inflation, and short-term versus long-term periods.

Long-term nominal assets, including nominal SPIAs, are priced in part based on long-term expected inflation. I believe it is still possible to get SPIAs with what they call "cost of living adjustments", meaning the payments go up a fixed amount every year. Assuming that belief is right, if those predetermined COLAs were around expected inflation, your SPIA might work out fine--as long as inflation was as expected.

The thing that particularly concerns me, though, is unexpected inflation. And in particular, I am concerned about long-term unexpected inflation. Because that could really cause long-term nominal assets, including nominal SPIAs with such fixed COLAs, to dramatically underperform expectations.

The reason stocks are a better bet for this problem is basically just the assumption that over long periods, on average those companies' operating profit margins will not be too sensitive to inflation rates, such that their nominal profits will go up if inflation is unexpectedly high (and of course down if inflation is unexpectedly low), such that their real earnings will stay around expected, at least on average.

And there is at least some reason to believe that is a decent bet. But with lots of caveats.

First, unexpectedly high inflation can still be associated with lots of adverse stock dynamics in the short term.

Second, this logic works best if you are very, very diversified. Including outside your own main currency zone.

Still, that's the main idea. You can't expect stock returns to track unexpectedly high inflation neatly in the near future. You can at least reasonably hope that earnings will at least mostly, on average, track unexpectedly high inflation higher over the long run.

In contrast, with any long-term nominal asset, there is of course no hope at all it will react in any positive way to unexpectedly high inflation. You simply know for a fact that means bad things for your real returns on that asset over that term.
A concept that people need to understand is that there can be a delay, sometimes a pretty big delay in when you get your inflation adjustment from whatever asset class you are invested in. Such asset classes such as Stocks, TIPS, REITs are touted as inflation fighters but in 2022, all of these inflation fighters are down in price even as inflation has, well, inflated. So it isn't like the adjustment for inflation is immediate. For Stocks, the inflation adjustment might take a decade or more. For TIPS, I suspect folks will see their "inflation adjustment" in the NAV for their TIPS funds over the next 3-4 years as the duration risks works its way through. REITs are stocks, so their "adjustment" could be delayed in very similar fashion to stocks. For nominal Bonds, it could take a generation. We need to be patient but at some point asset prices will adjust, it just isn't instantaneous.
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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by nedsaid »

bobcat2 wrote: Fri Dec 02, 2022 12:18 pm
nedsaid wrote: Fri Dec 02, 2022 11:00 amWell, is inflation protection expensive or is it not expensive? There was quite a loss of income upfront for those who bought CPI adjusted annuities and it took years for the monthly payments of the inflation protected annuity to catch up with the monthly payments of the nominal annuity.
Hi Nedsaid, I didn't mean to offend, but the point I was trying to make in that post was that annuitization is much less costly than bond ladders, if the goal is simply income.

With regard to the expense of inflation protection, I observed that when CPI adjusted (full COLA) life annuities were available, their price was roughly the same as a graded life annuity, where the graded life annuity annual escalation rate was about 50 basis points above the 20 year breakeven inflation rate. Of course, that regularity I observed was when inflation was quite low. If CPI adjusted annuities were currently available that regularity might not hold in today's much higher inflation environment.

BobK
Vineviz did a great job explaining this. Clarification was in order, I will edit my post. Okay, point made and everything is okay. Thank you. Your observations on annuities are excellent and added to the quality of the discussion.
Last edited by nedsaid on Fri Dec 02, 2022 12:23 pm, edited 1 time in total.
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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by Leesbro63 »

Northern Flicker wrote: Fri Dec 02, 2022 12:11 pm When CPI-adjusted SPIAs were first available, the reduction in initial payout rate was 30%, but that reduction rose to about 45%, which made them unpopular. Whether or not a hypothetical inflation-adjusted SPIA is expensive would be based on whether the reduction in initial payout is fair value for the net present value of the inflation risk.
For what it's worth a handful of Bogleheads have an AIG CPI-adjusted annuity that was issued in a short period of time just before AIG crashed and had to be bailed out by the Fed during the 2008-9 financial crisis. My mother has one. She's now 86 and enjoying the annual inflation-kicker to her income on that annuity. That being said, it turned out to be a deal that was too good to be true. Fortunately the Fed decided that AIG was too big to fail, so the annuitants, like my mother, did not suffer. But in hindsight, those annuities were priced better than the rest for a reason that we didn't understand until later. (Earlier this year there was a thread regarding how AIG had miscalculated the inflation-kicker. The handful of Bogleheads affected turned up on that thread, so that's how I know there is this handful. AIG made it all good and it appears to have been an honest mistake. But that was only after a few of us had to rattle their cage to get their attention.)
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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by Fremdon Ferndock »

You certainly would need some inflation protection if you owned a nominal annuity -- actually a lot of people do in the form of their retirement pension. If you began an annuity 30 years ago, based on the CPI the purchasing power would have declined by more than half (52.4%). This represents a compound annual loss of purchasing power of -2.44%. This occurred during a period of very benign inflation until this year (1992-2022). If inflation were to run at 4% annually going forward, your purchasing power would be reduced by 70% in 30 years. Even if you wait to start an annuity at age 85, the purchasing power would decline by about half by the time you reached 100 at an annual inflation rate of 4%.

So, I wonder about the merits of purchasing a TIPs ladder of 15 years @age 85 instead of an annuity at the same age. You certainly want to be able to keep up somewhat with the costs of healthcare in those endgame years, and it seems to me a TIPs ladder is a more secure way to do that.
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Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by AlwaysLearningMore »

Well, it might be simplistic (but that might not be a bad thing) but if an investor starts accumulating a large stash of I bonds about 30 years before they plan to retire, that would seem to obviate the “TIPS deflation risk” we read about. And with that there is no fiddling with individual TIPS.

At the 30 year mark, each I Bond would mature, and the funds be deposited into the funding account. Funds could also be accessed earlier, if desired.

Even if the investor does not start “early” they can certainly still accumulate a meaningful amount of I bonds.

A married couple can fairly easily dedicate $45,000 a year to I Bonds (individual for each, living revocable trust for each, $5000 tax refund). Additional investing through entity accounts is straightforward.

Certainly, it’s clear that I Bonds cannot currently be purchased through qualified savings accounts (at least as far as I know), so such investing would have to be done and nonqualified accounts at Treasury Direct.
Retirement is best when you have a lot to live on, and a lot to live for. * None of what I post is investment advice.* | FIRE'd July 2023
secondopinion
Posts: 6011
Joined: Wed Dec 02, 2020 12:18 pm

Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by secondopinion »

Taylor Larimore wrote: Fri Dec 02, 2022 11:23 am Bogleheads:

When I was licenced to sell annuities I learned one very important fact:

"A Single Premium Immediate Annuity (SPIA) provides the highest guaranteed lifetime income of any investment."

I am 98 years old and my two SPIA annuity checks continue to arrive every month!! Looking back, our two SPIAs are the best financial investments we ever made.

Another little known advantage of a lifetime annuity: With our income assured, we were able to give our heirs their inheritance while we are still alive.

Another great advantage: Peace of Mind knowing we will never run out of money!

Best wishes
Taylor
Jack Bogle's Words of Wisdom: "Depending on the particular circumstances, annuities are a good idea, but only annuities available at very low cost and commensurately high return."
It seems like it is working well for you; peace of mind is probably why it has worked. You continue to help people along their way and that is what matters. Thank you for your contributions.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
Northern Flicker
Posts: 15363
Joined: Fri Apr 10, 2015 12:29 am

Re: Bill Bernstein: "Playing Inflation Russian Roulette in Retirement"

Post by Northern Flicker »

Priced fairly, a COLA'd SPIA is worthy of consideration. I am not a fan of SPIAs with a fixed rate "COLA" such as an increase in payout of 2% per year. These are still priced using prevailing nominal bond rates, and do not protect against inflation being higher than projected.

But they have a skew that I do not find attractive-- they shift some of the payout from before the age of life expectancy to beyond the age of life expectancy. The distribution of payout no longer is a symmetric bell curve that matches the distribution of age at death. One could of course argue that in real terms, a fixed payout SPIA is not symmetric either.
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