What I want to know is where all these "smart people" when the big recession hit? Who do you know that forecast it well "before" it happened so those buckets could be rearranged...lol.
Annuities Advice?
- Thread starter Joe Rogers
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mathjak107
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your are mixing up 2 different things
don't confuse fortune tellers and predictors with researchers who deal with planning for these bad events when they happen ..
the smart people are those who develop the spending methods that are based on the worst outcomes in history and finding ways to continue your income stream without interruption in good and bad times ...
that is what the safe withdrawal methods and bucket systems are about or using insurance products integrating them in to the plan ...
these are all about dealing with the events when they happen , which they have done well since 1871 , not predicting them .
in fact if you retired in 2008 and followed a safe withdrawal method you are no different then any other retiree group in history.
a 40/60, 50/50/60/40 mix has a very low failure rate despite the great depression , world wars , crashes , and all the disasters we have had to date only 5% of the 119 30 year retiree groups to date would have failed with no adjustment follow a safe withdrawal rate method ... that is about the same odds of you spending down 4% inflation adjusted for 30 years and ending with 8x what you started with .
no one can predict the future but there certainly ways of allowing for uncertainty and planning for uncertainty.
as far as rearrainging the buckets ???? once established there is nothing to rearrange .
imagine having7 ears of safe money , 7 years of bonds and intermediate term money and all the rest equities .... you can go more than 15 years years without selling a share of stock ... or you can rebalance and refill along the way whenever markets are up ...there is no predicting in advance of anything
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New some folks that has the old "GM" stocks in their portfolios that watched it go straight down the drain...along with some others that were supposed to be so "golden".
Do not think it is always the case that anything "always" works. Times change big time. Figures lie and...well, you know the rest...lol.
mathjak107
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first of all buying individual stocks is speculating . you are betting on the whims of a particular company ...diversified funds have no individual company risk .
so betting on beaver cheese , land in florida or individual companies carries entirely different risks than just market volatility .
long term we are only dealing with market volatility . markets are up 300% since 2008 and 1100% since 1987 including the lost decade for stocks ... so any discussion about planning is about diversified equity funds or index's which are broad .
what lost money for investors is their own bad behavior not markets .
that is why retirement planning involves either bucket systems or rebalancing to provide their income streams . in down markets bonds get sold , not stocks .
so far 50/50 has a 95% success rate for surviving the worst of the worst we have ever seen ..in fact we have not seen anything as bad as those who retired in 1965/1966 since .... retirement planning is based on that group.
so what do the smart people teach us ???????????
by crunching the worst of the worst outcomes to date , their research teaches us that to draw 4% inflation adjusted takes a minimum of a 2% real return average the first 10 years of a 30 year retirement ... the entire outcome is decided in the first 15 years so if 10 years in you are falling behind you need to take a pay cut ..... that is very important research because we can all monitor in advance where we stand ...after the first 15 years you will excessively have spent down to far and even the greatest bull markets can't bring you back ....
so the smart people do not predict ..they take these worst outcomes and develop planning methods for them ...anything better than worst case is a bonus and we should take raises . 90% of all 119 30 year retirements so far have ended at 4% draw rate with more than you started with .. that is how conservative a 40 to 60% equity portfolio actually is and how well it works against the worst of the worst when poor investor behavior does not ruin things for you ..
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mathjak107
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this pretty much says it all
CallmeIshmael
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Sorry, this is taking a myopic view of the stock market based on past results in the US. How did a Japanese person who retired on January 1, 1990 do with a 50/50 mix of Japanese stocks and Japanese bonds? Not too hot and could have suffered draw downs that were too steep using a 4% withdrawal rate.
Using Japan is also not an unfair comparison given Japan is still stuck in a non-inflationary environment as is the EU - and if people have significant portfolio allocations to international equities, they could be subject to these issues as well.
I agree with many of your views about annuities - primarily that going with a type of annuity other than an immediate annuity is fraught with issues related to usury fees and unknown risks in the measurement assets. But immediate annuities have psychological benefits (behavioral finance is a thing after all, and we're subject to it more than we like to think) as well as simple budgeting benefits. For example, if you know you have certain monthly fixed costs to solve for and your retirement portfolio is a bit lower than you would like, then monthly annuity payments combined with social security benefits can provide very valuable peace of mind - and be financially sensible to boot. (I'm not a financial advisor, btw - I just think annuities are unfairly disparaged.)
mathjak107
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What you have is irrelevant as far as an amount ...it is still subject to the same math whether it is a million dollar portfolio or 100k ...
In any case a safe draw rate would be initially a 4% draw of whatever you have with a 40-60 % equity allocation and the rest assorted bond funds ...if one wants to share some of the bond portfolio with an spia no problem.. that draw rate would likely require raises taken along the way besides inflation adjustments,as 90% of all 119 30 year cycles have ended with more than you started with if you don’t
Making whatever we all have last 30 years is the same math regardless of amount....
I highly recommend they avoid variable annuities.
I have an index annuity. It’s not at all hard to understand. If the S&P index rises by 10%, my account rises by 10%. If the S&P’s have a bad year and falls by 10%, my account doesn’t move up or down. My annuity is not affected by any losses in the S&P index, only by the gains.
mathjak107
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Right off the bat I can see you don’t under stand it ...you can NEVER GET WHAT THE INDEX GETS. ...index linked annuities get nooooo dividends and dividends account for 20-30% of the s&p return .....your participation rate is also likely capped because the options they use are capped . It may be capped at a max of 10% but you certainly don’t get unlimited gains unless the point you start seeing anything extra is raised ... index annuities are either uncapped but need a minimum gain that is higher before you see an extra dime , or they cut in lower but are capped at a max ...
in short most years it is more like a cd on steroids not a proxy for a real equity investment...
I suggest you learn to understand what you bought because you obviously don’t understand how an index linked product works... I described in my post somewhere , just how you can do these on your own ...so don’t believe for a second that your explanation above is correct ... you get no dividends and your participation rate is likely a capped version ,it can never return what the index does .
So get back to us after confirming you get no dividends and tell us what your actual participation rate is ..it is in the plan offering .
Here is exactly how it’s done so you can hopefully understand why your understanding of what you think it is can’t possibly be .
By far, the simplest way to set up an EIA is to do it in an uncapped version. The simplest uncapped replication portfolio consists of a 1 year fixed income investment (such as a CD) and a call option on whatever equity index ETF you want exposure to. So let us assume you can buy a 1 year CD that yields (APY) 4%, you want exposure to the S&P 500, you have $100,000 to invest, and you want a minimum yield of 1%. To replicate an EIA, you would buy the following:
CD: You want $101k in a year, so you invest $101,000/1.04 = $97,115 in a 1 year 4% yield CD. In a year, the CD matures and you get $101,000, which is your desired minimum payout.
Options: Your CD purchase leaves you with $100,000 - $97,115 = $2,885. You take this amount and buy at the money 1 year call options on the S&P 500 indexETF (ETF symbol SPY). At the money means that the option exercise price is about equal to whatever the ETF sells for today. So with SPY trading at $137.93 as I write this in April 2008, we wish to buy April 2009 calls with a strike of $138. Such a thing doesn’t exist, so we will settle for the closest month we can get, which is March 2009. March 2009 calls (Symbol SFBCH) sell for $12 each and must be bought in contracts on 100 shares each, so you want to buy $2885/$1200 = 2.4 contracts, but must buy 2 contracts for $2400.
So you end up with a CD that will pay $101,000 in a year, $485 in cash, and options on 200 shares of SPY struck at 138. The options cover a notional amount of $138 X 200 = $27,600, so your “participation rate” in the index is 27,600/100,000 = 27.6%, meaning that you catch 27.6% of the appreciation of the S&P 500 through next March while bearing none of the downside. When the options are about to mature, you can sell them for cash, assuming the market has gone up and they are worth anything. Otherwise, you collect your $101,000 from the CD, have your $485 plus whatever interest it generated, and decide if you want to play this game again for another year.
or
Instead of having a small, uncapped participation in the index, you could have a larger participation but cap it at a given level. This is essentially what is done inside the EIA contract sold by most insurers. To replicate the EIA, you would buy the same CD as in the above example. However, the options portion would include:
1) Buy the at the money options on the index as in the above example
2) Sell out of the money options for the same expiration date and underlying ETF.
An example will be helpful:
Lets assume that you would be willing to cap your upside in return for a higher participation rate. That means you want to buy call options at the money ($138 strike) and sell call options at a strike that is about 10% higher ($152 strike). The $152 strike options currently trade for about $5.50 a share. So we buy:
4 contracts of the at the money options (SFBCH) for 400X12 = $4800
And we sell:
4 contracts of the 10% higher strike $152 (symbol SYHCV) and receive cash of $400X5.50 = $2,200.
Total out of pocket for the options is $4,800 - $2,200 = $2,600.
So you end up with a portfolio that consists of a CD that will pay you $101,000 in a year, $285 in leftover cash, and a package of options that gives you up to 10% of the upside on 400 X $138 = $55,200 worth of the S&P 500 index. Note that by capping your potential upside you have increased your participation rate to $55.2% of your $100,000, or double the uncapped version.
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A safe draw rate is closer to 2.8%. Plus someone with a nest egg of $100K should not, under any circumstances be directly in the stock market.
At one time I had a Series 7 license, stock broker. What has been suggested is so complicated that 99% of people couldn't handle it. A reasonable return of 4-6% without any thought at all is fine. Certainly for me and certainly for many if not most.
If it takes 1,000 words to describe something simple, it's not.
Rick
At one time I had a Series 7 license, stock broker. What has been suggested is so complicated that 99% of people couldn't handle it. A reasonable return of 4-6% without any thought at all is fine. Certainly for me and certainly for many if not most.
If it takes 1,000 words to describe something simple, it's not.
Rick
mathjak107
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I
The odds of 4% failing is the same as the odds of ending with 8x what you started with ...
That is because a 4% draw is already based on the worst of times .....
If we eliminated the 5 or 6 worst case scenarios we had a safe draw rate would be 6.50% .
So who ever is telling you this story needs to look at the research from guys like Michael kitces
nope ...that would be for fixed income portfolios .drawing 4% inflation adjusted and having at least 40% equities has resulted in 90% of the 119 30 year cycles to date ending with more than you started ..in fact 60/40 has ended with more than 2x what you started with 67% of the time and 3x what you started with 50% of the time .
The odds of 4% failing is the same as the odds of ending with 8x what you started with ...
That is because a 4% draw is already based on the worst of times .....
If we eliminated the 5 or 6 worst case scenarios we had a safe draw rate would be 6.50% .
So who ever is telling you this story needs to look at the research from guys like Michael kitces
mathjak107
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. ...with out knowing their full situation you should never make that claim ..what if they had big pensions and this is legacy money .....
Even at 65 we have money we won’t eat with for 20-30 years ..that is still long term money and there is nothing wrong putting long term money in a diversified fund and the rest in bonds and cash ...
100k is a small amount in the scheme of things and to be honest not much of a retirement savings . But the point is. When it comes to a safe draw rate the amount is not the determining factor ...but a retiree should have cash reserves for emergencies and 100k would not be enough to do it all if they did not have big pensions
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mathjak107
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a typical retirement portfolio is nothing more than 40-60% total market fund / the rest a total bond fund .. there is nothing simpler .. surely you are not suggesting a variable or index linked annuity is simple ... i would hope not .. as evidenced here few understand what they bought other then the words the person selling them wants them to believe .
many retirees use wellsely income
there has been lots of numbers crunching over the years by the likes of kitces , pfau , blanchette , .. the biggest risk has been going fixed income only . it has failed to last at 4% 64% of all 119 30 year cycles we have had ... 100% equities has actually been the safer bet with a 93% success rate .. while i am not suggesting retirees go 100% equities , 100% equities did about the same as 50/50 .
the reason is the up years are so powerful that they have cushioned the down years almost the same as 50/50 .
but 40-60% equities are the traditional retiree allocation and they have done well .
the 4% safe draw rate is based on what it would have taken to get through the likes of the worst of the worst for a retiree . if you retired in 1907,1929,1937, 1965 or 1966 you were a poster child for the worst times ever .
a safe withdrawal rate is not based on some average return as the un-informed think ..it is based on the worst of the worst time frames . which is why anything better leaves you with to much money unspent .
this is why 2.80% as a safe withdrawal rate would be a very inefficient use of your savings unless you were 100% fixed income ..which in my opinion would be a very inefficient use of ones savings regardless .
never ever assume some average , like 4- 6% is fine .. moishe milevski demonstrated how the exact same average return can fail 15 years earlier with nothing more then the sequence of the gains and losses being moved around ...the biggest risk a retiree has is sequence risk .
so 4-6% can actually fail if the sequencing is poor which is why you never use average anything in dealing with safe withdrawal rates ... they are not based on achieving any particular average . they are solely based on what it would have took for a retiree to get through the nastiest of times or in a monte carlo scenario the worst outcomes the computer can come up with .
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Yeah, I get it. My point is that I have a small amount of money in an index annuity just as "safe" money. The vast majority of my money is still invested in mutual funds that are tied to either the S&P or the NASDAQ.
I never said that I couldn't have done better, but it is my money, so I do what I want to do, not what you think I should do.
mathjak107
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it has nothing to do with you doing what you like with your money .
if you are going to give people information about your index linked annuity , get it right at least .. don't say you are going to get what the s&p 500 gets but with no potential for loss . that is blatantly false . not only that but you claimed they are so simple . you could not be more wrong , they are very complex and few understand what they bought or how they work and why they can never be an equal to an equity investment .
with no dividends and almost 2% in expenses plus commissions that is 4%-5% less as a minimum right off the bat and that only grows worse as dividends go up . .. then you only get a percentage of that market gain because your participation rate is capped .. in the end these really are fixed income investments , not equity investments ... the two should never be compared .... index linked annuities are like cd's on steroids and they can give you a bit of a boost in an up market but they are never an equal to an equity investment -ever.
nether you or a broker should ever try to pass them off as any kind of real equity investment .
like i said it has nothing to do with what you choose to do , it only has to do with the information you posted being false . you made it sound like you get what an investment in the s&p would get yet you could never loose money ... there is no such thing as a product like that .
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mathjak107
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so as you see even those who claim they understand these products obviously do not ...
by the time you really understand what you are buying when you buy both index linked annuities and variable annuities , YOUR HAIR WILL HURT trying to figure out the twists and turns .
on the other hand buying an immediate annuity is very simple . it is as simple as buying a cd. if you like the draw rate , that is the whole deal . all fees , commissions , etc , like a cd , are already in the product .
but you need to understand that these pay as much as they do out because of mortality credits . those who die pay for those who live .
that draw rate is not a return , it is the rate they give you back the money you gave them . it can take 17 years to get your money back and first see a penny of their money so that is when you first start actually seeing a return .
they can give you a draw rate higher then you can safely take it from your self . while early on you may want to hold to 4% , they can give you 6% since they invest in not only bonds but something we can never invest in , DEAD BODIES .. whoever dies gives their money to the rest in the pool .
they will be happy to sell you a life insurance rider for your heirs to get something but it is a very expensive way to buy life insurance
by the time you really understand what you are buying when you buy both index linked annuities and variable annuities , YOUR HAIR WILL HURT trying to figure out the twists and turns .
on the other hand buying an immediate annuity is very simple . it is as simple as buying a cd. if you like the draw rate , that is the whole deal . all fees , commissions , etc , like a cd , are already in the product .
but you need to understand that these pay as much as they do out because of mortality credits . those who die pay for those who live .
that draw rate is not a return , it is the rate they give you back the money you gave them . it can take 17 years to get your money back and first see a penny of their money so that is when you first start actually seeing a return .
they can give you a draw rate higher then you can safely take it from your self . while early on you may want to hold to 4% , they can give you 6% since they invest in not only bonds but something we can never invest in , DEAD BODIES .. whoever dies gives their money to the rest in the pool .
they will be happy to sell you a life insurance rider for your heirs to get something but it is a very expensive way to buy life insurance
mathjak107
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i never recommend them by themselves-ever .... but they do work well when they are used as part of the bond allocation in a diversified portfolio of equities and bonds.
when you are concerned about a surviving spouse , facts and figures shows us that a single annuity , your own investing and permanent life insurance works better than a joint annuity and your own investing . the tax free life insurance has a big edge over the annuity .
so the single annuity pays more then a joint , you have your own investing and then permanent life insurance for the spouse ... in 10,000 different scenarios run by dr pfau this comprehensive package beat buy term and invest the rest in 67% of the scenarios .
that tax free life insurance to a spouse now filing single can be very powerful .
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Bond fund seem to be really increasing. Know a fellow that bought a fund of high-quality long-term bonds in the spring, thinking he'd park the money after witnessing a bad sell off in the market. He is like a lot of others are thinking of a looming recession. He was really surprised when the bond fund jumped up. It was up more than 20% this year...lol. Lots of ways to make and shelter your dough. Having fun in retirement, to me is what its about though. Not spending so much time figuring and refiguring...unless its your main interest of course. Then, please go to someplace else for dinner, not my house!
mathjak107
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there are very simple portfolio's that are all weather . they make money up or down ...
they hold long term treasuries as well as short term treasuries , gold , and equities . all you do is rebalance once a year or when things get to far from the desired allocation . the permanent portfolio uses 25% in each .
another model the golden butterfly weights more for prosperity with 40% in equities . 20% in the s&p 500 , 20% in small caps , 20% in long term treasuries , 20% gold , 20% short term treasuries ...
that has beaten 60/40 since 1971 in return , less down years and less swing .
Sounds like a good plan. Gold has always seemed to be included in these types of plans. Have often wondered why gold is still thought of as so valuable. Chemically its boring, but is one of the "noble" metals, so that might be it. Its gorgeous. When you walk into the Cairo museum, better have your sun glasses on to view that stunning King Tut mask & chariot display in the center. It knocks your socks off with the morning sun coming through the windows. Its beyond beautiful. Shiny things are valued. Gold may be valuable just because it is so beautifully shiny and we, as humans have always been so in love with and mesmerized by its golden beauty.
mathjak107
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gold has a 5000 year history of being coveted ....
but gold can't be left sitting static . gold has to be used with a portfolio and rebalanced ... when you do that you take advantage of the rise and buy other assets ..
it is like equities have gone no where for more than a year .. but gold and long term treasuries are up 20-30% ...so they get rebalanced to add more short term treasuries and equities .
Yeah, its crazy with the short vs long term treasury bond markets today, too. Maybe things will keep going nuts here for a while with all the interest rates so low. Its like "how low can it go". Something is big time wrong. Do you know the history of why our money is worth less and less?
Read it somewhere and it scared the bloomers off of me...lol. We're heading for a train wreck.
mathjak107
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actually monetary inflation is quite low . a lot of the increases we see are shortage and demand based not an inflating money supply ..
just look at oil as an example.what was once scarce is now abundant . oil is cheaper today then 12 years ago ... when we increase supply or stop the over use prices fall on most things . it has nothing to do with the money supply