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Old 09-26-2012, 03:33 AM
 
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one of my favorite current day researchers in the field of investing is dr wade pfau.

dr pfau is one of the current crop of financial thinkers and researchers that fly in the face of old school thinkers and teachers.

new researchers like dr pfau , moshe milevsky and michael kitces have done more to educate the financial community including most pros today then i think anyone else.

most of todays new thinking by planners more than not goes to the teachings of one of those 3 .

well research by dr pfau and his predecessor in this area moshe milevsky have found that today using a single premuim immeadiate annuity and equities versus bonds and equities have yielded far superior results even at todays rates .


the reason is because dr pfau says we really need to watch 3 things in retirement planning.

that we have enough to meet our minimum spending needs forever, that we have enough to meet our wants and lifestyle goals forever and third that we have enough of a pile of money to manage the big risks in life.

we need enough of a buffer either for a legacy or to use as a reserve for managing risks, such as expensive health shocks, divorce, unexpected needs of other family members, severe economic downturns, or other types of emergency needs.

none of the above is accounted for in traditional retirement calculators but exist very much in life.

maximizing spending vs keeping a nice buffer go against what each other is trying to accomplish so you have to pick the balance you want for yourself as there is no right or wrong balance.

dr pfau attempted to find the right balances so you can maximize whether you want the biggest spending budget or the biggest bucket of assets in reserve

in either case he found the key was no bonds ,but an immeadiate annuity instead.


anyway here is what dr pfau has to say on the matter.


the red line represents the equities/ annuity . the blue represents equities and bonds. what a huge spread in results ,it really was startling.


Retirement Researcher Blog: An Efficient Frontier for Retirement Income

Last edited by mathjak107; 09-26-2012 at 04:03 AM..
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Old 09-26-2012, 04:05 AM
 
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one of the things i noticed is a conservative 30/70 mix when the 70% bonds was subsituted for an spia had a 97% chance of maintaining a 6% withdrawal rate while mainting at least 45% through out in a buffer.

the same mix using bonds and equities had an 88% success rate and only a 28% buffer
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Old 09-26-2012, 04:29 AM
 
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One plausible scenario is a real bloodbath in the long-bond market if/when interest rates turn up again. I imagine that traders think they will get out in time, but still someone, or some collective, will be left holding the bag. Of course, I don't know the future course of the economy any better than anyone else, but I would avoid long-term bonds like the plague these days . . .
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Old 09-26-2012, 05:29 AM
 
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actually i disagree. with us slowing down again and the world getting worse and worse more and more for the short term i think they are the best investment .

what else guarantees you a 2.5% minimum and has the potential to jump up 30% with even a 1 point drop in long term rates.

i think for the next year or two those may very well be the place to be .

in fact i may buy some 30 year zero coupon for even a bigger bang for the buck.

after the next year or two all bets are off as far as where they go from there so i rate them a short term hold as a decent speculation..

Last edited by mathjak107; 09-26-2012 at 05:40 AM..
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Old 09-26-2012, 06:08 AM
 
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I always try to think long term. But in the short term, you may be very well right. It's the inflation/deflation/interest-rate question. Interest rates could even go negative at some point, in which case bonds would do very well indeed. However, I can't imagine that we will avoid fairly stiff inflation over the long term. Someone who holds long-term bonds may, or may not, get out in time when this begins, although everyone thinks that he will. I don't want to take the chance, personally, as I am not that good at timing things.

Over the years we accumulated quite a large wad of I-bonds and EEs with an interest floor under them, the classic dullard's investment of the day (which have turned out to be a good compliment to our stock portfolio), and as the man said annuities, so I don't need or want any more fixed-income components. I also belong to a credit union that actually provides meaningful interest rates to depositors. New money goes into more stocks, which I hope will provide a legacy some day, although I am sure it will be a bumpy ride!
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Old 09-26-2012, 01:17 PM
 
Location: Ponte Vedra Beach FL
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The study in the OP doesn't take taxes into account. I think tax considerations are important. Robyn
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Old 09-26-2012, 03:13 PM
 
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the tax considerations are so varied i dont think they really can. dont forget pfau included social security as 2% and 4% for withdrawals to arrive at the 6%.

that in itself is a monster when it comes to taxes.
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Old 09-26-2012, 04:47 PM
 
Location: Ponte Vedra Beach FL
14,628 posts, read 17,969,752 times
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Quote:
Originally Posted by mathjak107 View Post
the tax considerations are so varied i dont think they really can. dont forget pfau included social security as 2% and 4% for withdrawals to arrive at the 6%.

that in itself is a monster when it comes to taxes.
Well then it's worthless IMO. Makes a big difference if you want to spend 6% and you're paying 35%+ in taxes on all your income - as opposed to paying 10%. After all - almost no one who is considering buying bonds or SPIAs is paying 0% in taxes. So you have to make a reasonable tax assumption (or 2 or 3) - and run with it.

Note that I have probably spent a lot more time in terms of tax planning over the decades than doing stuff like the stuff mentioned in your post. Because a dollar saved in taxes is as good as a dollar earned. And tax planning is easier than most other stuff.

IIRC - you're still working - and earning investment income - in NYC. You must be paying a ton in taxes (I won't even ask what % - would probably just make you sad). We're paying peanuts here in Florida. Because we're retired - and have a lot of tax-free and tax-deferred investments (like munis - the part of our IRAs we haven't converted to Roths/our Roth IRAs - our I Bonds - etc.). Our effective tax rate on all our income would be less than 5% this year (unless I decide to do another partial Roth conversion - which I probably will - have to run the numbers first - probably next month or so).

And this Pfau character - well he's just wrong IMO in terms of lumping all bonds together and comparing them as a class to SPIAs. There are bonds and there are bonds. I've always been a big fan of highly rated munis (although I am not particularly enthusiastic today at these yield levels - OTOH they're still higher than the returns on SPIAs assuming one lives a normal or shorter than normal life expectancy - at age 65 - I would get about a 2% return or so on a SPIA if I lived a normal life expectancy). Of course - munis don't help someone in a high tax state like NY as much as they help someone in a no-tax state like Florida. Because a resident of a no-tax state can have an extremely diversified portfolio without having to worry about state income taxes. Still - they can help in terms of bringing down the total tax burden.

I would also be concerned about SPIAs if - after I bought them - I wasn't left with enough capital to pay for really expensive stuff I might need when I was older - like long term care. OTOH - I do think SPIAs have their place. Especially for people who don't know how to invest at all - people who can't say no to their kids when they ask for money - kids who will impoverish them if money isn't tied up (my father has friends like that) - etc. And I wouldn't rule them out 100% 10-15 years from now (if I live that long) - especially if I was dealing with a charity of choice that seemed like it would be solvent for the rest of my life.

FWIW - and this isn't for your benefit - it's for the benefit people who don't know much about SPIAs. The monthly income you get may seem high - but it is a return of both principal and interest (like the mortgage payment you may be making - but in reverse). So what you get isn't your rate of interest. Also - in the first 13 years or so of an annuity - the majority of the money you get back (forget the exact %) is treated by the IRS as a return of principal - and not taxed. After about 13 years - the IRS treats all the money you get as interest - and all of it is taxed.

Finally - I was a bit unclear about that SS stuff. Does that 2% (out of the 6%) mean that if I want to spend $90k/year - I'd have to be getting $30k from SS - and $60k after tax on an asset base of $1.5 million (I'm just trying to deal with round numbers here - to try to figure out the concept)? Robyn
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Old 09-26-2012, 05:03 PM
 
Location: Ponte Vedra Beach FL
14,628 posts, read 17,969,752 times
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Quote:
Originally Posted by Hamish Forbes View Post
I always try to think long term. But in the short term, you may be very well right. It's the inflation/deflation/interest-rate question. Interest rates could even go negative at some point, in which case bonds would do very well indeed. However, I can't imagine that we will avoid fairly stiff inflation over the long term. Someone who holds long-term bonds may, or may not, get out in time when this begins, although everyone thinks that he will. I don't want to take the chance, personally, as I am not that good at timing things.

Over the years we accumulated quite a large wad of I-bonds and EEs with an interest floor under them, the classic dullard's investment of the day (which have turned out to be a good compliment to our stock portfolio), and as the man said annuities, so I don't need or want any more fixed-income components. I also belong to a credit union that actually provides meaningful interest rates to depositors. New money goes into more stocks, which I hope will provide a legacy some day, although I am sure it will be a bumpy ride!
So as not to mislead anyone here about IBonds. They were an extremely good investment about 10 years ago IMO. When the coupons were 3% or higher - and inflation was added on to that. Plus - you could buy them with a credit card and get frequent flyer miles . Today - the coupon is 0% - which makes them a heck of a lot less attractive IMO. Curiously - I found out about them listening to Clark Howard on the car radio (he's not considered a leading investment guru - but he was on target when it came to this investment).

What does your credit union pay in terms of deposits? About the best I can find these days when it comes to parking cash is about .6-.7% in on line so called "high yield" savings accounts. Our local credit unions pay less. Robyn
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Old 09-26-2012, 05:08 PM
 
72,007 posts, read 72,043,164 times
Reputation: 49565
Quote:
Originally Posted by Robyn55 View Post
Well then it's worthless IMO. Makes a big difference if you want to spend 6% and you're paying 35%+ in taxes on all your income - as opposed to paying 10%. After all - almost no one who is considering buying bonds or SPIAs is paying 0% in taxes. So you have to make a reasonable tax assumption (or 2 or 3) - and run with it.

Note that I have probably spent a lot more time in terms of tax planning over the decades than doing stuff like the stuff mentioned in your post. Because a dollar saved in taxes is as good as a dollar earned. And tax planning is easier than most other stuff.

IIRC - you're still working - and earning investment income - in NYC. You must be paying a ton in taxes (I won't even ask what % - would probably just make you sad). We're paying peanuts here in Florida. Because we're retired - and have a lot of tax-free and tax-deferred investments (like munis - the part of our IRAs we haven't converted to Roths/our Roth IRAs - our I Bonds - etc.). Our effective tax rate on all our income would be less than 5% this year (unless I decide to do another partial Roth conversion - which I probably will - have to run the numbers first - probably next month or so).

And this Pfau character - well he's just wrong IMO in terms of lumping all bonds together and comparing them as a class to SPIAs. There are bonds and there are bonds. I've always been a big fan of highly rated munis (although I am not particularly enthusiastic today at these yield levels - OTOH they're still higher than the returns on SPIAs assuming one lives a normal or shorter than normal life expectancy - at age 65 - I would get about a 2% return or so on a SPIA if I lived a normal life expectancy). Of course - munis don't help someone in a high tax state like NY as much as they help someone in a no-tax state like Florida. Because a resident of a no-tax state can have an extremely diversified portfolio without having to worry about state income taxes. Still - they can help in terms of bringing down the total tax burden.

I would also be concerned about SPIAs if - after I bought them - I wasn't left with enough capital to pay for really expensive stuff I might need when I was older - like long term care. OTOH - I do think SPIAs have their place. Especially for people who don't know how to invest at all - people who can't say no to their kids when they ask for money - kids who will impoverish them if money isn't tied up (my father has friends like that) - etc. And I wouldn't rule them out 100% 10-15 years from now (if I live that long) - especially if I was dealing with a charity of choice that seemed like it would be solvent for the rest of my life.

FWIW - and this isn't for your benefit - it's for the benefit people who don't know much about SPIAs. The monthly income you get may seem high - but it is a return of both principal and interest (like the mortgage payment you may be making - but in reverse). So what you get isn't your rate of interest. Also - in the first 13 years or so of an annuity - the majority of the money you get back (forget the exact %) is treated by the IRS as a return of principal - and not taxed. After about 13 years - the IRS treats all the money you get as interest - and all of it is taxed.

Finally - I was a bit unclear about that SS stuff. Does that 2% (out of the 6%) mean that if I want to spend $90k/year - I'd have to be getting $30k from SS - and $60k after tax on an asset base of $1.5 million (I'm just trying to deal with round numbers here - to try to figure out the concept)? Robyn
You can post questions to him on that blog and he will gladely address the questions.

One thing i learned reading his papers is many of our concerns when analyzed at the level these guys do is they dont seem to influence things to the extent we think or even at all
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