- quote -

I thought of that as I was writing, Will. I'm sure they declined, but I
think not as much as the stock market. Still, you have to live somewhere . .
..

Elizabeth Richardson

Elizabeth Richardson wrote:

- quote -

Not that you can plan for everything, but what did home prices do in the
1930s?

-Will

HW \"Skip\" Weldon wrote:

- quote -

Anyone looked into longevity insurance? Is it something to consider?
It seems like it would also fit in the same category as annuities or
reverse mortgages (wrt this discussion).

-Will

- quote -

While I believe DH and I have saved enough to last throughout our
retirement, my ace in the hole is our house. Should we live much longer than
anticipated, or endure another decade like the 1930s, a reverse mortgage
will be an option.

Elizabeth Richardson

In article <3sqte2l90ipkgu38k9ssn88jltpa9709mn[at]4ax.com> ,
"HW \"Skip\" Weldon" <skip5700removethis[at]hotmail.com> wrote:

- quote -

I completely agree -- and continue to explore committing some
fraction of my savings to an immediate annuity; indeed, I tend to
classify Social Security and a (small) defined benefit pension as
an annuity component, and the debate (with myself) concerns whether
to put an additional fraction of IRA/401K savings into an annuity.
The study beliavsky pointed out to us is definitely of interest in
that regard.

On Fri, 25 Aug 2006 07:10:57 -0500, beliavsky[at]aol.com wrote:

- quote -

This deserves consideration. My own sense is that one of the greatest
risks my generation faces is lengthening life expectancies and the
real possibility of exhausting our resources.


-HW "Skip" Weldon
Columbia, SC

Michael Siemon wrote:

<snip
- quote -

Somone with no desire to leave an estate may be a good candidate for an
immediate annuity and/or a reverse mortgage.

In article <0PlHg.2670$yO7.1438[at]newssvr14.news.prodigy.com> ,
Tad Borek <borekfm[at]pacbell.net> wrote:

...
- quote -

Ummm, one of the major talking points of the study is precisely
the strategic needs of retirees who _do_ wish to leave a bequest,
hence the maintenance of non-annuitized resources, despite issues
of equity volatility for risk-averse retirees.

I grant that the piece is in the most soporiphic of academic
dry-as-dust styles, but there is some meat in there if you look...

In article <q8mHg.2674$yO7.1889[at]newssvr14.news.prodigy.com> ,
Tad Borek <borekfm[at]pacbell.net> wrote:

- quote -

Apologies for my last follow-up. I agree that the kinds of assumptions
made to address these questions are not much like my own, or those
I would expect from others. But I think they suggest the way events
turn out when some weighting of the various considerations is made.

For myself, I don't have any compelling interest in leaving an estate
-- but in my Monte Carlo simulations, it turns out that to make it
reasonably likely that I will _not_ exhaust my resources before death,
while having a reasonable (if fluctuating) income, there is a
substantial chance of a largish estate even if I live more than my
actuarial estimated lifespan. That needs to enter into my planning.

Tad Borek wrote:
- quote -

Hit send too soon - some of these things I mentioned were addressed in
the paper but the way they do it seems a bit unrealistic to m. They are
trying to maximize U but are not weighting early cash flows for soft
variables like "preference for taking a vacation at age 68 instead of
having a similar sum available 8 years later." And while bequest plans
are part of the model, I don't think many people express those plans in
the terms they do - it's a vaguer amount that will be left behind,
rather than a preference that can be reduced to a coefficient in the
utility function.

-Tad

beliavsky[at]aol.com wrote:
- quote -

I think it may be appropriate that the paper is on TIAA-CREF's site. One
more practical aspect of this question is that the typical
withdrawal-rate assumptions used in these studies seem more appropriate
for an institutional manager rather than an individual - someone who by
contract is guaranteeing a certain stream of payments over the lifespan
of an individual or, really, a pool of individuals. Individuals are able
to plan things differently and so I see these studies as being useful
only for getting a ballpark estimate of maximum-but-conservative
withdrawal rates, for burning through all your savings during retirement.

The primary flaws in the assumptions that I've seen, as compared to the
behavior of actual retirees, are:
* increasing withdrawal rates for inflation, irrespective of the
principal amount, while variations in retiree spending year to year have
little or nothing to do with the change in CPI
* assuming full depletion of the nest egg over a lifetime, while many
retirees (and especially, those who have been "good savers" over a
lifetime) plan to leave something behind
* not accommodating the desire of many retirees to spend at a higher
rate in their earlier retirement years, to enjoy retirement while they
are able to travel & be more active

I like that 4% observation - taking out 4% per year - similar to that
idea of walking, repeatedly, 1/2-way towards a wall (you never get
there). The key is making sure you can live off with a
4%-of-a-much-smaller-principal withdrawal rate.

-Tad

beliavsky[at]aol.com writes:

- quote -

I took only a quick glance at the paper with the intention
of reading it later. You've just pushed it way higher up
on my list. Thanks.

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BreadWithSpam[at]fractious.net wrote:
- quote -

I think it's theoretically wrong to ignore principal changes each year,
and in practice some retirees do cut spending if their portfolios
suffer negative shocks. An asset value falls for two main reasons:
(1) expected real cash flows from the asset can decline, or
(2) the real discount rate can rise.

Situation (1) is worse for the investor than (2), since in situation
(2) the expected returns on his asset have risen. An investor should
set spending levels based on both asset values AND long-term expected
returns, which change over time. For example, an investor in
inflation-indexed bonds (TIPS) would enjoy a capital gain if real
interest rates fall, but he should not increase spending proportionally
with TIPS prices.

- quote -

The paper I cited discusses this strategy and is generally positive
about it. One's expected lifetime (denoted E(T)), decreases as one
ages, so it makes sense to consider a strategy where the proportion of
remaining assets spent each year increases proportionally to 1/E(T).
The paper studies this also.

BreadWithSpam[at]fractious.net wrote:
- quote -

I think if I withdrew 4%, It would be % for living expenses+% for
discretionary=4%

so I would state my "minimum" withdraw is 2.5% for living expenses. I
would then withdraw the other 1.5% for discretionary expenses. In down
years I will always take out the 2.5%, but may not take all or any of
the 1.5%.

"jIM" <noreplysoccer[at]hotmail.com> writes:

- quote -

I've been thinking about that prescription for a while -
starting in year 1, take 4% of your original assets, say
you have $1,000,000 and take $40,000. The standard
prescription is to thereafter increase that $40,000 by
the rate of inflation and it seems to fully ignore what
happens to the remaining principal in the hopes that it
will have increased adequately to cover both the withdrawal
and the inflation. Under that algorithm, the studies have
come up with probabilities that you won't run out of money
over various time periods (ie. 30 yrs).

I'm curious - and may write some simulations myself to see
how it behaves - what if the prescription were modified:
Instead of taking out $40,000 * (1 + inflation), each year
reset the withdrawal to 4% of what remains. That means
that in down years, you take out *less* - sometimes a lot
less - than you took out before. Instead of running out
of money - what's more likely is that there'd be some
years of budget tightening as one's income goes down in
down years rather than forcing it up by the rate of
inflation at those times as the original formula causes.
(Of course, if the 4% that one can take out is, no matter
how tight one's budget gets, not enough to live on, this
plan can cause a serious disruption - or leave one breaking
the 4% rule and eating capital).

There are a bunch of possible modifications which would
probably stretch it out more, too - ie. if the growth
rate is greater than 4% + inflation in a given year,
one could still limit one's withdrawals to the the
lesser of (last year's withdrawal * 1+inflation) or
(4% of current principal). That means in fat years,
rather than withdrawing the "bonus", one keeps it banked.

Anyway, just something to think about. If anyone knows
of a study which used this algorithm or some variant of
it, I'd be very curious to see it.





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beliavsky[at]aol.com wrote:
- quote -

I got through the first 5 pages, maybe 7, and decided I would rather
read my thesis than this one... and I have not read my thesis in years.

I think the discussion point is a good one, though. When to use an
annuity and when to use investments. I am long way (30+ years??) from
retiring, but I like reading up on the options possibly available.

Here are a few questions (forgive me if they were in article and I did
not read that far).

Assume a $100,000 amount of wealth.

If I invest in 75% stock/25% bond, I could expect about an 8% rate of
return, and withdraw around 4% each year to get an income stream of
around $4000. Costs to me are in the mutual funds themselves (and
already removed from the 8% rate of return). This will last me y
years. I may live to z years. The risk is z> y.

If I take the $100,000 amount of wealth and purchase an annuity, what
determines the "rate of return". Is the actual payment received more
or less than the 4%/$4000 above? The risk of z> y in this case goes
away, correct?

If the amount increases from $100,000 to $1,000,000, the asset
allocation model multiplies by 10. Is this principal the same with
annuities? Or does the larger amount get a person a higher benefit
(more than 10x the benefit purchases previously?).

This study contains the fallacious assumption that people will spend
all they
are required to withdraw from a 401K-like plan. The law requires one
to
pay taxes on an inverse life expectancy withdrawal, but not spend all
of it.
No wonder this study predicts troubles after age 80. Alternative
studies in ones 80s
ones spending decreases because one is isnt as active or consuming as
younger.

I think the comparison of withdrawal rules is interesting.

http://www.tiaa-crefinstitute.org/re...2_horneff.html
Optimizing the Retirement Portfolio:
Asset Allocation, Annuitization, and Risk Aversion
Abstract
Retirees must draw down their accumulated assets in an orderly fashion
so as not to exhaust their funds too soon. We derive the optimal
retirement portfolio from a menu that includes payout annuities as well
as an investment allocation and a withdrawal strategy, assuming risk
aversion, stochastic capital markets, and uncertain lifetimes. The
resulting portfolio allocation, when fixed as of retirement, is then
compared to phased withdrawal strategies such a
"self-annuitization" plan or the 401(k) "default" pattern
encouraged under US tax law. Surprisingly, the fixed percentage
approach proves appealing for retirees across a wide range of risk
preferences, supporting financial planning advisors who often recommend
this rule. We then permit the retiree to switch to an annuity later,
which gives her the chance to invest in the capital market and "bet
on death." As risk aversion rises, annuities first crowd out bonds in
retiree portfolios; at higher risk aversion still, annuities replace
equities in the portfolio. Making annuitization compulsory can also
lead to substantial utility losses for less risk-averse investors.