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Old 12-31-2014, 07:06 AM
46 posts, read 54,410 times
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Originally Posted by mathjak107 View Post
and think about the disaster that can take place the first 5 years if a downturn hits . the overspending down can collapse an entire 30 year time frame.
We had two options:

1) Put our retirement income savings into an immediate annuity and get about a 4% return with consistent checks coming to us for the rest of our lives with basically no worries if the economy or stock market had troubles. Even if the 2000-2002 or 2007-2009 crashes happened we would be OK. But at our death the money would be gone and nothing would be left over for the kids.

2) Put our money in stocks, and ETF's that have a history of consistent dividends that have never gone down even in the 2000-2002 or 2007-2009 super bear markets. If the value of the stocks went down there was a 99% chance that our dividends would stay the same or go up. And when we die there is going to be a good chance the investments would be worth something, we could pass on to the kids.
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Old 12-31-2014, 07:15 AM
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or as discussed in another thread a combo of the two has been proven over and over to not only produce the highest success rates of not failing but the biggest pile at the end assuming just average life expectancy .


because right now the cash flow on a spia is very high compared to the next best return on safe money cd's and treasury bonds. that is 5.78% for a single right now or 5.57% for a couple vs only 4% on your own. remember we are talking cash flow withdrawal rate not roi.
it is cash flow that buys the things we want.

1 million would give you 55,700.00 first year in the spia vs 40k from a 50/50 mix. how much more cash would you need to take away from stocks over and above the income from your bonds and cash to have another 15,700 to spend ?

using the spia for cash flow you need to hold alot less in cash and bonds and can allocate more to stocks then you could otherwise for that same cash flow.

that leaves stocks with a higher allocation to grow . study after study shows that to duplicate those results you would need to enter retirement with a lower allocation to stocks and increase them in a rising glide path over years.

good luck getting your spouse to do that with you gone.

what i would not do is buy an annuity by itself as in your first example. that would offer little benefit except a guaranteed slightly higher income not dependent on markets . but unless you take life insurance benefits heirs get squat.

in my opinion the spia is not a product most of us want to use by itself. but it can be a powerful product when a partial annuitization is used with your own investing.

if i had no heirs i could do what you said in example 1 and have a mid six figure income for as long as my wife and i live. that is more than we could spend .

in fact we could get 60k a year more from the spia than from drawing 4% from our own investing and hoping a severe downturn does not force a pay cut. not a bad deal if maximum safety and income is your goal.

perhaps for someone who wants guarantees the spia for a high rate of spending spending , some emergency fund and life insurance for heirs may be a good all round plan and all amounts locked in without listening to another market report again.

this is one of the most in depth studies


Last edited by mathjak107; 12-31-2014 at 07:53 AM..
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Old 12-31-2014, 08:24 AM
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let me add one other thought which i just posted in another thread but it is important enough to repeat.

the draw back to investing all on our own with no pensions is our wives.

our wives are not us or in some cases the reverse is true.

one spouse may not want to shoulder 100% of the risk that goes with market investing if you are gone. most women want security in knowing they are not going to be homeless ,out of money and the proverbial bag lady.

setting up a structure that the other spouse can live with too is very important. so while yes my rising glide path can match the performance of the spia and investing on my own , i am not so sure down the road that is the right thing to leave her saddled with.

few think about the fact that women as a group( i was going to say women as a whole but glad i didn't ) have very very different finacial needs than men. they live longer , don't want risk as much as men and while 80% of men die married, 80% of women die alone.

you may want to read the above again.

i just may add a floor of guaranteed income at some point and do it because it is the right thing to do for my wife if i am not around, at least the basic bills should have a pay check coming every month for her and 100% of her income should not be up to the whims of interest rates and market gods.

few men that do all their own investing ever think about what happens when they are not around and how solid and easy is the plan for her . most important how does she feel about the risks of being soley dependent on markets without you..

keep in mind too the more conservative your plan the more the spia has been shown to increase success.

Last edited by mathjak107; 12-31-2014 at 09:22 AM..
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Old 12-31-2014, 09:41 AM
3,492 posts, read 4,963,974 times
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Originally Posted by mathjak107 View Post
it is called systematic withdrawals and it has been the standard way to draw an income for decades.

the money is pulled either from all assets equally or you keep a few years worth of cash and then liquid bonds and equities to refill as needed.

trying to spend dividends or interest directly can make for an undependable income stream when rates are non existant and or dividends are slashed or suspended in downturns.

it really does not matter one bit if your growth comes from interest ,dividends or capital appreciation. it all amounts to the same thing.

your allocations ,risk tolerance and desire for slack in the plan will determine how much you can take .
Class in session:

Automatic dollar withdrawals create the opposite impact of DCA (dollar cost averaging) resulting in a geometric mean that is lower than it would otherwise be.

In simpler terms: If you get your set amount of money from selling your position in stocks, you are selling more shares when prices are lower and less shares when prices are higher.

If you're taking money in interest vs qualified dividends and the account is not tax advantaged, it makes a big difference on your tax bill. Therefore, it does not all amount to the same thing.

The misunderstandings were perfectly reasonable for someone that has never worked in finance. If you have worked in finance, don't admit to it now.

Class over.
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Old 12-31-2014, 10:48 AM
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class back in session , so take notes: this is called retirement planning 101. it is typical of how retirees structure with a few years of withdrawals in place at the start of each year.

first off i have no idea what the babbling about reverse dca has to do with the tax bill. you pay tax on the dollers of profit sold not the number of shares sold.

depending on time frame your average cost basis could be higher or it could be lower so no clue what that was supposed to mean nor do i it evewn meaning anything in this regard..

in practice most folks are going to use the dividends and interest and keep a cash buffer to make up what they need to live on since most folks who depend on their portfolio need more to live on than dividends especially with both dividend rates and interest so low. .

that cash buffer is refilled via systematic withdrawals selling stocks and bonds as needed.

it is that buffer that has to be refilled that can have the income drawn any number of ways from the portfolio.

for most folks they have most of their equities in their retirement plans so even if they reinvested the dividends and sold a piece of something else it wouldn't change things..

so in a simple bucket system for withdrawals you could have a few years of safe money in bucket one . bucket 2 can have a few years of bonds , bucket 3 all stocks.

over the years i am using up my bucket 1 cash and reinvesting my dividends and interest in my stocks and bonds letting them grow for years . , my tax bill is no higher regardless of the type of account.

you may want to reread that again.

as bucket 1 runs low i can channel the dividends and interest in and sell some bonds and refill. my tax bill is no higher because regardless if i needed to refill the cash buffer because dividend and interest are not enough nothing changes.

when 2 runs low we sell equities from 3 and refill both 1 and 2 .

it is a simple process and taxes do not change.

now when i said it does not matter how you pull it was in this regard. when it comes time to fill that cash buffer some folks use a bucket system. other folks pull equally fromn the pie preserving their allocation they wanted. there is no advantage using a bucket method or a systematic withdrawal method from all assets.

that is why i said it does not matter how you draw the money.

class out.

Last edited by mathjak107; 12-31-2014 at 12:12 PM..
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Old 12-31-2014, 01:01 PM
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I think most here would agree it would certainly pay to reinvest your dividend keeping the value of you investment intact for the start of the new quarter and spend cash instead.

Or perhaps sell something that is at a loss and take the write off and owe zero tax on the dividend.
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Old 12-31-2014, 01:03 PM
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Walking in where fools may fear to tread: I think Lurtsman is correct but his meaning may have gotten a bit lost. My reading is that:

1. If you are receiving taxable interest it will be taxed at your tax rate regardless of whether you save it or spend it.

2. If you are receiving qualified dividends, they receive special treatment (as of this moment), and are taxed at a lower percentage regardless of whether you reinvest it or spend it. The special tax treatment being the point of his comment.

Therefore, money invested in taxable interest producing ways will have a higher tax bill then someone with the same income who receives qualified dividends instead. Higher taxes produce a lower effective yield.

The part where he talks about the number of shares being sold is a separate topic from tax considerations. You are correct that taxes are paid on capital gains and not the number of shares sold. But I think his point didn't have to do with taxes. I think he was saying that if you sell when the market is down and have to sell more shares as a result, you will have less of a portfolio working for you when the market rises.

Summarizing this, he is then pointing out that because of these factors it does make a difference how money is both invested and withdrawn.
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Old 12-31-2014, 06:17 PM
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for reasons of the way dividends work getting the dividend vs selling off a piece of the portfolio and not getting the dividend would equal the exact same thing regardless assuming same total return.

we spoke about this many times in other threads.

a portfolio is not a case of interest ,capital appreciation or dividends

all the pieces have a purpose. interest is not the same as dividends , dividends are not the same as interest and there are reasons why you have all 3 components.

retirees who live off their portfolios with out pensions always have a few years cash which they use to pay bills.

receiving dividends and interest and reinvesting them back in to the assets and paying cash for the bills in no way creates any additional tax vs just spending
dividends and interest and using up less cash. The cash will just last longer before having to be refilled from equities and bonds regardless.. people who count on their portfolios for support and not just fun money need a constant source of cash to go with Interest and dividends, especially in times when their are cuts and suspensions like the 100 billion in dividends that were not payed out in 2008-2009.

interest and dividends serve different purposes . interest is added on to your principal when paid. if you had a 100 dollars and get 3 dollars interest you have 103 dollars.

if your stock appreciates from 100 to 103 dollars over the quarter you get 3 dollars as a dividend and your stock becomes worth only 100 at the start of the next quarter so unless you reinvest it the start of the next quarter begins with only 100 dollars as a starting point not the 103 you had prior invested in the stock.. all compounding over the next quarter takes placeeon the 100 you started with not the 103 in value you had before the dividend .

a non dividend payer that was 100 bucks and appreciated 3% but didn't pay a dividend has 103.00 dollars invested at the start of the next quarter.

you could sell 3 bucks off the value of that stock and have the same 100 dollars invested at the start of the new quarter.

there is no advantage of one over the other as long as you owned your assets a year..

we get interest on our safe money , we get dividends on our at risk money and we get capital appreciation on our assets . it isn't a case of one or the other , you need all 3 parts and all 3 play a role if you are living off your nest egg..

Last edited by mathjak107; 12-31-2014 at 06:39 PM..
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Old 01-01-2015, 02:03 AM
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if the teacher above correcting me was talking about reverse dca and having to sell more stocks at a loss during downturns increasing the the odds you would run out of money he would be wrong,.

drawing down from 100% stock in good and bad times performed better than having bonds and cash in the portfolio to draw from in bad times .yep, drawing down from 100% stocks actually performed better than a 50/50 mix.

the reaon is the up years not having the weight of bonds and cash dragging it down provided plenty of cushion for the excessive stock selling in the down turns. the only exception being if you were hit hard the first 5 years before the first up cycle which except for the y2k retiree has not happened much..

so how did 100% stock compare to a 50/50 mix?

looking at every rolling 30 year period since 1926 a 50/50 mix would have gone bust 4% of the time. drawing directly from stock would have gone bust only 2% of the time.

not using 100% stock is more a mental issue than a practical one. the only danger would be an extended downturn the first 5 years before an up cycle built up that extra cushion.

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Old 01-01-2015, 03:56 AM
Location: Connecticut is my adopted home.
2,277 posts, read 3,083,587 times
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Another approach: We do receive pensions but can see a time coming where those pensions will likely be capped and outrun by inflation to the point of needing a second income stream to pay the bills. We sold a second home in another state to invest in income generating property and started a small business. Being a busy person i had to find good use for my extra time.
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