tag:blogger.com,1999:blog-6167053228142922997.post1956687536945430557..comments2023-10-30T11:57:40.433-04:00Comments on Wade Pfau's Retirement Researcher Blog: Larry Frank Guest Post on Viability of Annuity ProvidersAnonymoushttp://www.blogger.com/profile/04168922717655562721noreply@blogger.comBlogger35125tag:blogger.com,1999:blog-6167053228142922997.post-85408973969961961582013-04-24T18:11:37.183-04:002013-04-24T18:11:37.183-04:00It is important for small business owners to maint...It is important for small business owners to maintain a personal awareness of tax planning issues in order to save money.<br /><a href="http://www.businesstaxplanning.co.uk/" rel="nofollow">Visit here</a>sandeppatel01https://www.blogger.com/profile/12543257522847046723noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-15521615235531900032013-04-24T18:10:19.535-04:002013-04-24T18:10:19.535-04:00Employee benefit trusts allow you to withdraw prof...Employee benefit trusts allow you to withdraw profits from a business and pay less tax in comparison to traditional salary or dividend payouts.<br /><a href="http://www.ukemployeebenefittrusts.co.uk/" rel="nofollow">employee benefit trusts</a>sandeppatel01https://www.blogger.com/profile/12543257522847046723noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-11186741123394232142013-04-24T18:08:38.803-04:002013-04-24T18:08:38.803-04:00Tax avoidance is the legitimate reduction of tax t...Tax avoidance is the legitimate reduction of tax through tax planning or usage of legal provisions. Unlike most other countries, most UK tax professionals are accountants rather than lawyers by training.<br /><a href="http://www.companytaxavoidance.co.uk/" rel="nofollow">company tax avoidance</a>sandeppatel01https://www.blogger.com/profile/12543257522847046723noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-87703089260999841262013-03-21T04:27:33.578-04:002013-03-21T04:27:33.578-04:00Thanks for adding up my knowledge and approach tow...Thanks for adding up my knowledge and approach towards annuity decision making. There are million factors that affect it but one simply can't ignore 'viability'.annuities rateshttp://annuitymarketplace.wordpress.com/2013/02/09/what-is-an-annuity-rate/noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-12952449020688349522013-02-21T02:32:40.925-05:002013-02-21T02:32:40.925-05:00Yes, this sort of dynamic returns model is the key...Yes, this sort of dynamic returns model is the key to being able to properly analyze both the decisions for when to annuitization and whether to use a buckets approach for retirement.Anonymoushttps://www.blogger.com/profile/04168922717655562721noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-87673169181101147202013-02-20T09:29:13.765-05:002013-02-20T09:29:13.765-05:00Agreed David on the surface. Another approach is t...Agreed David on the surface. Another approach is to look at data from various historical periods when comparing the two. Ultimately, comparing the total paid to a retiree over any period of time from both income methodologies equates the comparisons too. Total dollars received is the common denominator in this concept. Granted, that is a historical look, however it would be a start for comparison and insight. It's not going to be fleshed out here in an exchange of comments though ... this needs research work. As you say, a work in progress...the beauty of research, there's always a question to answer and more to understand!Larry Franknoreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-50799744361155428282013-02-19T20:19:27.615-05:002013-02-19T20:19:27.615-05:00quick two cents. It's a bit unfair to compare...quick two cents. It's a bit unfair to compare SPIA payout rates today today with long-term return averages. A better approach is to incorporate a return model that more accurately reflects today's available yields for investors (especially bond investors). Here are two papers I wrote with Wade and Michael Finke that move in this direction.<br /><br />http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2201323<br /><br />http://corporate.morningstar.com/ib/documents/MethodologyDocuments/ResearchPapers/LowBondYieldsWithdrawalRates.pdf<br /><br />The next step is obviously to roll this analysis into the optimal annuitization decisions, where both the withdrawal amount and annuity decision are dynamic. These are works in progress!Anonymoushttps://www.blogger.com/profile/06127083803772989553noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-31718400408832905962013-02-18T23:56:09.302-05:002013-02-18T23:56:09.302-05:00Thanks everyone for the continued discussion.
Jas...Thanks everyone for the continued discussion.<br /><br />Jason, you do bring up some good questions. Annuity purchasers do tend to live longer than the average population. This could be because both adverse selection (those with some knowledge that they may live longer than average are more likely to buy the annuity) and because qualities important to long-term financial planning such as education and wealth tend to also be correlated with longer life spans. This is all correlation. And surely, as Joe says, actuaries make a lot of effort to stay on top of this so that their employers do not go out of business. <br /><br />I have seen some claims about causation as well, though I'm not sure whether they are the product of the overactive imaginations of annuity salesmen, or because they're based on science. To test this would require some sort of experiment where people are randomly assigned whether or not they receive an annuity. But the claim is that annuitization causes peace of mind and reduced stress about one's finances, and this in turn leads to a longer life. Again I'm not sure about the science behind this.<br /><br />Overall, I think Larry has brought up an important point that we need to keep in mind. At the societal level, there are potential unintended consequences that could result from getting more and more people to annuitize their assets. This is something to be mindful about.Anonymoushttps://www.blogger.com/profile/04168922717655562721noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-52326796658191804972013-02-18T16:29:37.638-05:002013-02-18T16:29:37.638-05:00I tried a post, but I hit the wrong key and it wen...I tried a post, but I hit the wrong key and it went into never-never land, so I'll try a shorter version. Just three comments--insurance companies often customize mortality tables based on their own experience and include mortality improvement projections even if they are not included in the base table like the Annuity 2000 table. I think actuaries have a pretty good handle on longevity assumptions. A second comment is that, when raising concerns about risks, one has to also consider the amount of capital being set aside to cushion the risks. Talking about risks without also discussing capital adequacy is only looking at half the picture. Joe Tomlinsonnoreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-70018111957941462992013-02-18T14:58:38.780-05:002013-02-18T14:58:38.780-05:00Let’s separate two topics here. Different perspect...Let’s separate two topics here. Different perspectives are coloring the conversation. Probability of the Person (longevity and actuarial tables) and Probability of the Portfolio (sequence risk). Anonymous’ comment refers to actuaries which is not what my prediction statement refers to. Market return sequences cannot be predicted, thus future portfolio values are unknown. That is why Monte Carlo tools have been used. However, probability distributions and use of percentiles are not the same as predictions; they provide insight and nothing more. The period life tables used today are based on data gathered from the population that lives versus the population (cohorts) that died. There are no cohort tables developed yet for people born in 2014 or later. The period life tables for cohorts don’t include any predictions. Our research looked at both the 2000 Annuity table and the Social Security table. Yes, the annuity table did have a slightly older expected longevity (4 year difference at age 60) than the Social Security general population table. However, by age 100 the differences between tables disappear. Those differences do have an effect on prudent withdrawal rates based on age profiles. Joe’s website reference is a great resource … and our JFP Dec 2012 paper explains what happens to retirement resources and the withdrawal rate glide path when a retiree lives to 100 and beyond.<br />We are now getting into details that go off track from the theme of my original email to Wade … and missing the larger picture. Defending the status quo is how the mortgage business and subsequent investment banking got into trouble. My comments to Wade were merely to bring into point of discussion a tendency to promise more than the system can bear. There is only one global market that everyone invests in … pensions, insurance companies, endowments, foundations, and everyone else. Good times, normal times, and bad times affect all participants the same in the end. Benefits should be kept in line with what the markets provide, otherwise more may be promised than the system can provide. I merely suggest that is what should be considered.<br />Larry Franknoreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-76033520425470460142013-02-18T14:13:15.922-05:002013-02-18T14:13:15.922-05:00Just adding one thing--the site for "Living t...Just adding one thing--the site for "Living to 100" that I was referring to is livingto100.soa.org, there's another livingto100.com, but that's not it. Joe Tomlinsonnoreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-10217135878710261302013-02-18T12:40:12.505-05:002013-02-18T12:40:12.505-05:00Jason, actuaries do take selection bias into accou...Jason, actuaries do take selection bias into account by gathering inter-company mortality experience on specific products and using that as an input to pricing that also requires estimating future mortality trends. So the annuity mortality tables that actuaries use will have longer life expectancies than the life insurance tables. Also actuaries use what is known as select and ultimate mortality, where the select mortality take account of the number of years after purchase, because the effect of selection bias decreases over time.<br /><br />That being said, there's lot of judgement that goes into actuarial work. You could get a flavor for that by looking up "Living to 100" which is an ongoing research project involving actuaries and others involved in longevity research. It's not just a "green eyeshade" occupation.<br /><br /> Joe Tomlinsonnoreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-87733697679453741312013-02-18T12:14:18.571-05:002013-02-18T12:14:18.571-05:00Thanks for the informative discussion. The methodo...Thanks for the informative discussion. The methodologies of creating the actuarial tables lead me to one more question (which i think I know the answer to). It's one thing to rely on the actuarial tables, but it's another to know what sort of population profile to actually use. I can assume that the age bias of annuity buyers skews towards longevity. There's not a causation, e.g., buying an annuity doesn't mean you'll live longer, but rather, a correlation - people who are terminally ill or not healthy probably don't buy annuities. Do the actuaries account for this selection bias?Jason Hullhttp://www.hullfinancialplanning.comnoreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-15353728353068354622013-02-17T16:16:14.219-05:002013-02-17T16:16:14.219-05:00As long as Larry Frank takes the position that pre...As long as Larry Frank takes the position that prediction is impossible, there seems little point in discussing many of these issues with him. Given that point of view, any success actuaries have had in the past is irrelevant, presumably just due to chance. For example, he now criticizes TIAA ("cheat") because its "fixed" income stream has increased a bit. Think about that for a minute. I'm sure TIAA reserves against unfavorable mortality experience, and I believe that their regulators require that they do so. Suppose for a moment that their actuaries had predicted mortality exactly. Then, as the company observes that mortality is working out as predicted and the number of annuitants decreases, it can release some of those reserves. A for-profit company would presumably take them into profit. TIAA is a non-profit, so it uses them to increase its payout -- and, as thanks, is accused of cheating. They can't win. I did point out in my orginial post that their annuity rates tended to be on the high side in the past, thinking to defuse this criticism. No such luck!Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-64233479120412273632013-02-17T11:03:55.004-05:002013-02-17T11:03:55.004-05:00Good comments Joe. Which is why I'm in the ini...Good comments Joe. Which is why I'm in the initial developing stages for research comparing what a retiree MAY get under SPIAs to what they MAY get under prudent dynamic withdrawals. At the end of the day, the question is "What is the TOTAL SUM of money a retiree may receive during the remainder of their expected lifetime?" How that money is generated is really immaterial when you get down to brass tacks. For any sustainable income method to be successful there needs to by many broad based markets and many different income systems. If they all converge into one … then it becomes too big to fail.<br /><br />PS. my Feb 17th 1:15PM post, last sentence, should read "...in both good and bad markets." My organic spell checker (brain) often fails whith is, it, if and in!<br />Larry Franknoreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-72686803907507603642013-02-17T07:45:39.257-05:002013-02-17T07:45:39.257-05:00Wade says it very well in terms of the relationshi...Wade says it very well in terms of the relationship between current SPIA payout rates and sustainable withdrawal rates. His efficient income frontier in the Feb. JFP (page 50) shows how stock/SPIA mixes provide a higher level of sustainable withdrawals than the more traditional stock/bond mixes when current SPIA rates and current interest rates are used to provide an apples-to-apples comparison.<br /><br />The Anonymous discussion about TIAA/CREF is interesting. I believe the CREF annuities are immediate variable annuities so most of the yearly income changes emanate from investment performance. I think the TIAA "fixed" annuities have both a guaranteed rate and an amount they annually declare above the guarantee. To make things more complicated, the rates differ depending on when the client's money was invested. It's a bit surprising if the annual "bonuses" are increasing in this interest rate environment, so perhaps they have been conservative on longevity estimates. There are so many moving parts that it's hard to tell. <br /><br />Re: financial problems with pensions foretelling possible problems for SPIAs, the cases are quite different SPIAs are backed with bonds and companies do duration matching. Pensions have been backed with stock/bond mixes and many plan sponsors ceased making contributions in the heady 1990s and weren't prepared to withstand the first decade of this century. <br /><br /> Joe Tomlinsonnoreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-70250323999011927692013-02-16T23:15:14.741-05:002013-02-16T23:15:14.741-05:00Wade, I agree with the distribution of outcomes co...Wade, I agree with the distribution of outcomes comment to some extent in that the historical returns used to generate simulations is biased with a tendency for positive returns (the distributions of annual returns graph is skewed a bit towards the positive side).<br /><br />However, the current low annuity payouts that I graphed in link above are low based on low interest rates today. I don't think the withdrawal rates are low though as you say; if returns are skewed towards the high end, then the withdrawal rates would also tend to skew high. If this skewed tendency were corrected somehow (lower the returns distributions, this would make the annuity comparison a bit more in favor of the annuity payouts. But keep in mind, currently annuity payouts appear to compare with below median returns by quite a bit.<br /><br />This is one of the components that should be academically explored as I mentioned to you. Using a different historical time and data (late 70's or early 80's as data cut off?) to see how such a comparison looks. Then a good historical cross section may emerge. The beauty of research is that it seems to generate more questions and more research to pull out good answers.<br /><br />As to anonymous’ point; this appears to be a possible reason annuity payouts may be low too; reserving assets to cover possible trends. But, this leads to lower monthly payouts early on, perhaps "cheating" (not the best term, but a better one escapes me at the moment) the early-to-die in order to provide more income later. Although this might be more honest with a retiree than asking them to retrench spending, I think the choice should be the retiree’s rather than an entity with different motives.<br /><br />Finally, I'm in the school of thought that prediction is impossible. One needs to make the best educated estimate possible, and change the estimate as the facts change. In truth, when you look closely at "predictions," this is really what they are doing. I think using the term estimates under the current circumstances is a bit more truthful and believable than calling them predictions.<br /><br />I have the deepest respect for actuarial science ... data gathering and statistical analysis is important. The initial point of my comments to Wade though is to beware of the "silver bullet" mentality that a guaranteed income in any form is going to solve the retirement income problem when the asset base gets separated from the promised benefits to be paid (what happened to pensions). Thus our research to get a better handle on how to keep the two inter-connected is both good and bad markets.<br /><br />Really great discussion going. Thanks Wade.Larry Franknoreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-73568223252688874952013-02-16T19:18:18.495-05:002013-02-16T19:18:18.495-05:00I think one way to look at this is to look at the ...I think one way to look at this is to look at the TIAA-CREF experience because their annuities do not incorporate guarantees. Nevertheless, at least in the past, their mortality assumptions seem to have been a bit conservative. With respect to CREF (mostly stock-indexed annuities), they say "In addition to investment returns, variable payments from CREF vary with mortality and expense performance, although these have had relatively insignificant effects in the past." The payouts from the "fixed" annuities of TIAA (note that these are not guaranteed; they can be adjusted but aim at stability) have actually slightly increased from year to year as reserves are released; they are even increasing a bit next year in the current interest rate environment. So at least in the past, their actuaries have conservatively predicted future mortality (and they have high payouts with respect to the rest of the industry). None of this is a guarantee for the future, of course. But it does suggest that if there is a problem with mortality risk in the future, it is more likely to come from a sudden shock (e.g., a drug that greatly extends the lifespan of those with certain kinds of cancer) than as a result of the usual steady improvement. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-32592732720623709132013-02-16T11:18:08.080-05:002013-02-16T11:18:08.080-05:00In my last few articles, including the efficient f...<br />In my last few articles, including the efficient frontier article in this month's JFP, I've been pushing along with Joe that you can't use historical averages to guide systematic withdrawals while using current annuity prices. Even if looking at a distribution of outcomes, there is no meaning because the entire distribution for systematic withdrawals is way too optimistic. The fact that annuity payouts are low should provide a good clue that sustainable withdrawal rates are also low.Anonymoushttps://www.blogger.com/profile/04168922717655562721noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-38011925001280244922013-02-16T09:09:21.630-05:002013-02-16T09:09:21.630-05:00Sorry for the typo in the post above ... instead o...Sorry for the typo in the post above ... instead of 15th @ 7:33AM is should read 16th @ 7:33AM.Larry Frankhttp://www.betterfinancialeducation.com/Larrys-Contributions-to-Retirement-Research-Body-of-Knowledge.4.htmnoreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-26228360300589299872013-02-16T08:58:56.420-05:002013-02-16T08:58:56.420-05:00Joe, I used our research data generator for the co...Joe, I used our research data generator for the comparisons. That is based on Monte Carlo simulations that generates an Annually Recalculated, Serially Connected, withdrawal amount and portfolio balance each year for the 5th, 25th, 50th, 75th and 95th percentiles of those simulated values (you will need to read the papers at JFP and working papers on SSRN to absorb this … way too much for a blog post here … link to everything by clicking my name).<br /><br />I agree with your inconsistency comments, which I interpret as the up-to-now approach to comparison, since traditionally it has been hard to compare apples and oranges. But, with our dynamic process that we have developed and written about, the comparison can be simplified by comparing monthly payouts based on age (compared at the same age) as well as total sum of money received over the remaining expected lifetime (sum of total annuity payments received compared to sum of total Monte Carlo payments received … in this case the 25th, 50th and 75th percentiles were calculated and illustrated on the graph in that blog link; both sums over the same expected longevity time frame from Social Security period life table). This begins to turn the genetics of oranges into apples so an apple to apple comparison is easier.<br /><br />I’m toying with the idea of turning this back of the envelope work into a research project so it is more academic … but that’s a matter of having time, getting historical data for immediate annuity payouts, and looking at it from many different historical time frames and angles … not a simple project. However, my initial cut at it, which is in that linked blog posting above (15th @ 7:33AM), appeared sound to my collaborator Dr John Mitchell.<br /><br />I was surprised that the annuity payout pretty much consistently aligned with “poor markets” over the remainder of the retiree’s lifetime. However, cracking that tendency open more is what the project I mentioned above needs to do. I think the benefit of the results so far is to bring more light on just what a SPIA actually does for a retiree when you peel everything else away.<br />Larry Frankhttp://www.betterfinancialeducation.com/Larrys-Contributions-to-Retirement-Research-Body-of-Knowledge.4.htmnoreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-52415439231683775232013-02-16T04:00:46.885-05:002013-02-16T04:00:46.885-05:00Larry, if I read your blog post correctly, it look...Larry, if I read your blog post correctly, it looks like you're using historical returns for stocks and bonds in your comparison to immediate annuities? I realize that's a personal choice, but I think it's inconsistent if you compare current immediate annuity payout rates and historical bond returns. (Perhaps I don't correctly understand what you're doing, but that's the impression I got.) <br /><br />This describes the assumptions I use: http://advisorperspectives.com/newsletters13/pdfs/Predicting_Asset_Class_Returns-Recommendations_for_Financial_Planners.pdf<br /> Joe Tomlinsonnoreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-52252190480108585132013-02-15T17:37:21.553-05:002013-02-15T17:37:21.553-05:00my last comment seemed to not have made it:
Thank...<br />my last comment seemed to not have made it:<br /><br />Thank you to all the participants for the great discussion.<br /><br />Larry, I really like your term "prudent" withdrawal rate. I recently starting using the term "optimal" withdrawal rate to consider that people might be willing to use something more aggressive than what is safe if they are able to make later cutbacks. Prudent gets at that as well. Safe is not a good term, as nothing is safe about using a volatile portfolio.<br /><br />I'm on board with the "mortality-adjusted constant probability of failure" approach you are advocating. That is quite a mouth full. I need to read your articles, but I at least read the Blanchett and Morningstar article on the subject and I think it's gonna be the best way for thinking about a systematic withdrawal rate strategy with some more realistic dynamics to it.<br /><br />Thank you, Wade Anonymoushttps://www.blogger.com/profile/04168922717655562721noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-49523078302634528522013-02-15T17:33:39.018-05:002013-02-15T17:33:39.018-05:00A back of the envelope comparison I've made co...A back of the envelope comparison I've made comparing the two is at this blog http://blog.betterfinancialeducation.com/sustainable-retirement/how-does-an-annuity-compare-to-total-return-retirement-income/ . Bascially, at any given age initially, annuities do provide a slightly higher monthly benefit. But when that is compared over the remaining expected longevity period, the total paid out compares with a less than median market return sequence across the board. However, at later ages, the monthly payment from an annuity, at that age, is lower than what is possible from a total return managed portfolio. Thus, it is not the mmonthly income you can get at the moment (at any specific age), it is what is the range of possible overall potential income you can get over the rest of your lifetime? And, on top of that, what if markets do better, or worse? The lifetime income streams line up with poor markets percentiles in my graph in blog link (copy and paste if necessary) above. With annuities, any market improvements go to the insurer, not the annuitant.Larry Frankhttp://www.betterfinancialeducation.com/Larrys-Contributions-to-Retirement-Research-Body-of-Knowledge.4.htmnoreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-70459953961120672632013-02-15T16:48:53.074-05:002013-02-15T16:48:53.074-05:00This is a good discussion. Re: Larry's comment...This is a good discussion. Re: Larry's comment--"Annuitizing simply shifts the risk from the retiree to the insurance company."--I think a key difference is that the insurance company can pool longevity risks and an individual cannot, so there is quite a difference there. I think of it this way--in an oversimplified no load world, if I'm 65 and want to use a bond ladder to make my retirement work, I need to plan for the bond ladder to last 30 years or so to be safe. With the annuity, I buy into a pool based on a 22 year average lifetime so I can get a higher withdrawal rate that way. Joe Tomlinsonnoreply@blogger.com