Fixed annuities vs TIPs

Research on Safe Withdrawal Rates

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unclemick
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Fixed annuities vs TIPs

Post by unclemick » Mon Mar 14, 2005 8:09 am

A new cat, Tony2002, is getting the usual treatment over at Dory36's forum for doing something outside the box.

My question is this -? can the SWR methodology be used to illustrate the pro's and con.'s numerically - rather than just talk/opinion.

How could the problem be framed?

We have TIP's data. Could runing Tip's vs a Vanguard(?probably the lowest cost) fixed annuty/s indexed for inflation and perhaps non indexed illustrate how much you are paying for the'guaranteed income stream'?

The expenses and other practices of annuities have been slammed in the past. But being blockheaded - show me the numbers. Is there a way to use the SWR tool set to do this??

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Post by beachbumz » Mon Mar 14, 2005 8:19 am

Hi Unclemick!

People interested in annuities may also want to check out Berkshire Hathaway, they have some pretty competitive (with V*) over there.

I think the lower cost annuities becomes a more viable option the older you are, of course that's JMHO, but if you want the security of knowing how much you are getting each month and don't mind (or want to) dying broke, they may be the way to go.

Beachbumz 8)
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Post by unclemick » Mon Mar 14, 2005 9:32 am

Beachbumz

I agree - my memory( a fragile thing) says annuities under certain conditions have appeal to the older crowd. Outside the numbers - the govt(medicaid) can only tap the income stream if you end up in a nursing home. Estate recapture laws and five year look back rules are giving trusts a hard time.

Reverse mortages, fixed annuties in old age - may have appeal.

Wonder what the numbers say for long ER spans - 30. 40. even 50 yrs.

P.S. With nine years to RMD and 85% in trad IRA - I may have a left handed annuity of sorts - Courtesy the IRS.

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Post by JWR1945 » Mon Mar 14, 2005 9:44 am

Here is a quick, incomplete response.

Gummy's wife insisted that he buy an annuity to cover part of his retirement expenses. He thought that it was a lousy idea. It turned out to be one of the best decisions that he ever made.

Here are a few references from Gummy's site.

Start with the Sensible Withdrawal Rate series. Annuities are at the third link.
http://www.gummy-stuff.org/sensible_withdrawals.htm
http://www.gummy-stuff.org/sensible_2.htm
http://www.gummy-stuff.org/sensible_3.htm

Here are some additional links at his site.
Life Annuities
http://www.gummy-stuff.org/Life_Annuity.htm
Cashing in an Annuity
http://www.gummy-stuff.org/cashing-annuity.htm
Buy an Annuity or Annuity, Yes or No
http://www.gummy-stuff.org/annuity-yes-no.htm

You would expect this last tutorial, Buy an Annuity or Annuity, Yes or No, would answer all of your questions. I don't think that it does.

Just remember that annuities can make sense, especially as one grows older. Life insurance companies buy Government bonds and other secure investments to cover annuity payments. You can do the same unless there is a big effect caused by the uncertainty of an individual's lifespan. Younger retirees get no bargain because they are almost certain to last a long time. Older retirees can do better. If they are lucky enough to live longer than might be expected, they luck out financially as well. If they die early, does it really matter that much anyway?

In general, we would just apply the mortgage formula from the lender's perspective to available TIPS holdings. This is what I do to calculate Safe Withdrawal Rates with TIPS-only portfolios for various time periods and with various interest rates.

The fallacy behind many of the discussions involving annuities has been their treatment of bonds (now including TIPS). Buying an annuity locks-in an interest rate. Our calculators are incapable of understanding that. In addition, there are times (such as today) when TIPS interest rates are very low. There have been times when they were high. The rate that you lock-in matters. For example, Gummy found out that a lousy 9% rate back when he purchased his annuity is a fantastic 9% rate today.

Have fun.

John R.

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Post by unclemick » Tue Mar 15, 2005 6:00 am

Annuities do not seem to be bound for a calm reasoned discussion of creative uses of this financial instrument.

So - for me - I will leave them on the back burner - until I get - heh, heh - really old - or history future puts them above some long term trend lines to make the payout more interesting.

Like real estate - interesting, but not for me.

Back to Boglehead balanced index plus dividend stocks.

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Post by unclemick » Tue Mar 15, 2005 10:22 am

Heh, heh, heh, heh

Except for some show me the data razzing on Dory's forum.

Bad!!! - I know - Puts me in the mood to work on my taxes.

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Post by JWR1945 » Tue Mar 15, 2005 8:39 pm

I have not run numbers yet. But here are a couple of conclusions.
1) Tony2002 has an excellent investment plan. It is suited for his needs.
2) Tony2002's adviser has done an outstanding job.
Most likely, it is also true that Tony2002's adviser has been rewarded handsomely.

Look at what Tony2002 is doing with his $75000 in stocks: short-term trading. His approach is suitable for our new Gambling board. He is not a stock market investor. He is a stock market gambler.

The bulk of his money should not be in stocks. His play money would be better spent in one of unclemick's funds for now. He might do well to start investing in dividend stocks later. But he needs to know how to invest before he puts his money into the stock market.

Tony2002 seems unaware of his actual return in his annuity. For example, he does not separate the return of capital from his investment income except for tax purposes.

His strategy requires reinvestment of a portion of his income in order to keep up with inflation. He addresses this issue, but not with numbers.

Tony2002 is receiving shabby treatment. Tony2002 has had to post his thread starter about four times just to get people back on topic.

Overall and with only a few exceptions, Tony2002 has been receiving horrible advice from posters. They are not looking out for Tony2002's needs. They are pressing their own agendas.

Have fun.

John R.

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Post by JWR1945 » Tue Mar 15, 2005 8:42 pm

There is a need at the other forum for a descriptive reference of the Data-Based SWR Tool. Here it is.

Read my thread SWR as a Tool dated Mon Jun 14, 2004.
http://nofeeboards.com/boards/viewtopic.php?t=2607

Have fun.

John R.

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Post by JWR1945 » Tue Mar 15, 2005 8:50 pm

There have been a couple of swipes about my selection of data when I make calculations. Apparently, the writers think that they have a compelling argument of some sort. I chalk it up as a lack of experience in handling real world data.

In any event, Gummy has provided additional insight as to how the data respond to P/E10. He calculated regression coefficients (for the relationship between Historical Surviving Withdrawal Rates and the percentage earnings yield 100E10/P) versus start year.

Gummy's GARCH thread dated Sat Jan 15, 2005.
http://nofeeboards.com/boards/viewtopic.php?t=3264

Gummy's contribution is quite helpful. It is consistent with Ed Easterling's analysis relating stock market returns and inflation. Ed Easterling has posted using the name Crestmont.

Have fun.

John R.

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Post by hocus2004 » Wed Mar 16, 2005 2:24 am

He is a stock market gambler.

So is intercst. Intercst is a gambler who got lucky and who let it go to his head.

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Post by unclemick » Wed Mar 16, 2005 5:26 am

SWR as a tool fits my truck as a better way of stating it - than the SWR tool.

The SWR as an indicator in an analylsis methodology does a better job of conveying the power and breath of the methods employed.

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Post by beachbumz » Wed Mar 16, 2005 5:59 am

JWR1945 wrote:There is a need at the other forum for a descriptive reference of the Data-Based SWR Tool. Here it is.

Read my thread SWR as a Tool dated Mon Jun 14, 2004.
http://nofeeboards.com/boards/viewtopic.php?t=2607

Have fun.

John R.
I noticed there were some good debates going on in this thread between JWR, BPP, Hocus and Salaryguru. Then I noticed that BPP said that a post by Salaryguru was deleted. Is that true?

Beachbumz :?
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Post by beachbumz » Wed Mar 16, 2005 6:12 am

hocus2004 wrote:He is a stock market gambler.

So is intercst. Intercst is a gambler who got lucky and who let it go to his head.
Hi Hocus!
I agree that Tony2002 is 'gambling' with a small percentage of his portfolio my swing or day trading. I am guilty of this as well, it keeps my adrenaline level up. :D

I disagree that Intercst is a gambler in the stock market in the sense that Tony2002 (or me) is. I have never heard of Intercst short-term trading, so that is a VERY bad comparison. In a broad sense we ALL gamble when we invest money. There is no 100% guaranteed investment. Some would argue that bonds backed by the 'full faith and credit' of the US government are even becoming suspect. For instance, your portfolio of I-bonds, CDs and TIPS are now worth less than they were 2 years ago in terms of world currencies. IOW, if you cashed out now, your standard of living would be 30 to 40% less in Euro land than it would have been 2 years ago.

I think one mistake you made (again JMHO) is that you did not 'gamble' (read take risks) with your investments prior to quiting your corporate job. I read your post that Ataloss put up regarding your plan and I think your thought process was flawed. You didn't want to take risks that could delay your retirement past a certain point. I believe that was the perfect time to take those risks since you could have continued working for a while longer if things didn't work out. Your quote above implies to me that you are upset with yourself that you didn't take that 'gamble' and Intercst did.

Executive summary: Once again, you are comparing apples and sledgehammers when you compare Tony2002s 'gambling' on short-term trades to Intercst's investing in the S&P500.

Beachbumz 8)
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Post by hocus2004 » Wed Mar 16, 2005 8:02 am

This thread contains the text of the deleted SalaryGuru post, my explanation of why I deleted it, and some community comment on the decision:

http://nofeeboards.com/boards/viewtopic.php?t=2636

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Post by beachbumz » Wed Mar 16, 2005 10:56 am

hocus2004 wrote:This thread contains the text of the deleted SalaryGuru post, my explanation of why I deleted it, and some community comment on the decision:

http://nofeeboards.com/boards/viewtopic.php?t=2636
Thank you for the link Hocus. Quite honestly, (and not to bring up old news, but I wasn't here 9 months ago) I understand much more about why you are having all these problems at the various boards. As a forum moderator, I believe you have a duty to act in the best interest of the community and not of yourself. There was nothing wrong with SG's post and like the others (th, bpp, etc.), I agree with it. There was no reason for it's deletion other than it didn't fit in with your agenda and that's sad. It looks like you alienated several board members right there.

Beachbumz :?

BTW, my apologies to all community members as I'm sure this was tossed around pretty good back then, but since the link to the thread was in a recent post, it brought this to my attention.
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Post by hocus2004 » Wed Mar 16, 2005 11:41 am

Intercst is a con man, BeachBumz. There is no place for intercst in a community of people seeking to share ideas on what it takes to win financial freedom early in life.

He got a number wrong in a study he posted to the internet in 1996. He became aware of the error on May 13, 2002. JWR1945 offered his first data-based analysis supporting my finding from the mid-1990s--that changes in valuation levels cause changes in the SWR--on May 16, 2002. I put up a post on August 27, 2002, quoting William's Bernstein's SWR findings, which are supportive of my findings and of JWR1945's findings and in direct conflict with intercst's wild and absurd SWR claims.

Intercst makes a promise on his web site to update his study as he learns of new developments. There has been no update for close to three years now re the hocus findings, the JWR1945 findings, or the Bernstein findings. Nor has there been a single reasoned post from intercst in over 34 months explaining why he disagrees with Bernstein, hocus, and JWR1945 or why he refuses to honor his pledge to make readers of his study aware of the new information that has come to his attention.

Intercst's web site is well read. If you type the phrase "Retire Early" into the Google search engine, I believe it comes up first. If it doesn't come up first, it at least comes up high in the rankings. That means that there are people being newly exposed to The Intercst Con on a daily basis. In the event that these aspiring early retirees place any confidence in the REHP study's findings, they are putting their retirements at grave risk of going bust by doing so. Bernstein has said that anyone thinking of using a conventional methodology study to plan a retirement today would be well advised to "FuGeddaboutit." Bernstein is of course offering sound counsel. Intercst is not advising people to forget about his SWR claims. He is leaving the study up at the web site as a trap for the unwary. This is unconscionable behavior.

I accumulated $700,000 in assets in nine years so that I could pursue my L:ife Project of helping aspiring early retirees win financial freedom early in life. I intend to continue doing just that. Intercst is the greatest force on Planet Earth today standing in the way of our movement's efforts to provide sound information on how to retire early. Naturally, I oppose The Intercst Con and intend to do all that I can to diminsh the danger he presents to those not aware of his long history of highly dishonest and highly abusive posting on the SWR question.

The SalaryGuru post was a word-game post aimed at blocking reasoned discussion at this board of what the historical data says re SWRs. I have a Zero Tolerance Policy re such posts. My views on this matter are well known. I founded this board so that the many community members who had expressed a desire to be able to engage in reasoned debate of what the historical data says in peace would have a place where they could do so. Any individual thinking of coming to this board to disrupt the learning experience that our community is trying to build here may consider himself or herself warmly invited to take his or her posting business elsewhere.

If you do not understand what an SWR is, you should be asking questions, not putting forward statements as to how those who have informed themselves of the facts before posting should be handling the intercst problem. If you have informed yourself of the ABCs of the topic discussed here prior to posting, you should not be defending the word game tactics that were employed by SalaryGuru in the one post that I have been compelled to delete from this board in my time as board moderator here.

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Post by unclemick » Wed Mar 16, 2005 12:08 pm

Ran the numbers on Vanguard's site for fixed, no inflation adjustment if I converted 750k of IRA - came out ballpark 7.5% or 56k or 4666/mo. for age 62, single male.

In the example I used: 750k IRA, 150k stocks, 100k timberland, 1200/mo early SS.

So if the stocks, SS, and timberland were considered inflation fighters - an ER in his/her 60's could craft some combo's using annuities as one of the cards in the deck.

To repeat - the younger you are in ER the less appealing(at least to me) and you give up flexibility.

Clearly though - an option not to be dismissed without investigation.

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Post by beachbumz » Wed Mar 16, 2005 1:52 pm

unclemick wrote:Ran the numbers on Vanguard's site for fixed, no inflation adjustment if I converted 750k of IRA - came out ballpark 7.5% or 56k or 4666/mo. for age 62, single male.

In the example I used: 750k IRA, 150k stocks, 100k timberland, 1200/mo early SS.

So if the stocks, SS, and timberland were considered inflation fighters - an ER in his/her 60's could craft some combo's using annuities as one of the cards in the deck.

To repeat - the younger you are in ER the less appealing(at least to me) and you give up flexibility.

Clearly though - an option not to be dismissed without investigation.
Hi Unclemick!
You should also check out www.brkdirect.com. I ran your scenario through Berkshire's annuity and got $4750 per month (more if you take semi-annual or annual withdrawals), but I don't know if I got all your facts exactly the same. If I did, that's almost another $100 per month! :D I also did it for me, at age 38, and the number drops to $3703 per month, again with no inflation adjustment. Just proves the point that it makes more sense the older you are.

Beachbumz 8)
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Post by beachbumz » Wed Mar 16, 2005 2:07 pm

hocus2004 wrote:I accumulated $700,000 in assets in nine years so that I could pursue my L:ife Project of helping aspiring early retirees win financial freedom early in life. I intend to continue doing just that.
A good cause for sure Hocus! I accumulated 1.5 million in 7 years so I could enjoy life! :D
The SalaryGuru post was a word-game post aimed at blocking reasoned discussion at this board of what the historical data says re SWRs.
I don't see it that way and neither did SG, BPP, TH and others. I saw the post as a disagreement with you, that's it.
If you do not understand what an SWR is, you should be asking questions, not putting forward statements as to how those who have informed themselves of the facts before posting should be handling the intercst problem.
I think I've got a pretty good grip on what an SWR is. It's a withdrawal rate that would have been safe in hindsight (ie the past). That is the only SWR and will always be the only SWR.

Beachbumz
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Post by unclemick » Wed Mar 16, 2005 2:34 pm

Ah yes - The SWAG.

Wether Bogle's method(one I like) or some of the methods employed here - we all have a future SWR either consiously or subconsiously in the way we have deployed our retirement assets.

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