tag:blogger.com,1999:blog-6167053228142922997.post5789165011334237722..comments2023-10-30T11:57:40.433-04:00Comments on Wade Pfau's Retirement Researcher Blog: Decomposing SPIAs: Rising Equity Glidepaths vs. Mortality CreditsAnonymoushttp://www.blogger.com/profile/04168922717655562721noreply@blogger.comBlogger16125tag:blogger.com,1999:blog-6167053228142922997.post-34711832864473020222014-01-09T03:02:59.235-05:002014-01-09T03:02:59.235-05:00It is hard to make conclusion on retirement lifest...It is hard to make conclusion on retirement lifestyle. The scenario outcome is really provocative. <br /><a href="http://jameshendries.com/about-lpl-financial-advisor/smart-choices-for-retirement-planner/" rel="nofollow">Personal Asset Management</a>Anonymoushttps://www.blogger.com/profile/10825085739595834214noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-66963917154741167622013-09-28T02:43:47.760-04:002013-09-28T02:43:47.760-04:00Nice article.It discussed a lots of points about E...Nice article.It discussed a lots of points about Equity Glidepaths and Mortality Credits.It gives a clear idea about the subject.<br /><a href="http://www.sophosfinancial.com" rel="nofollow">financial advisor Maryland</a> Anonymoushttps://www.blogger.com/profile/03711272009313938114noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-46068677910698560172013-08-26T14:05:57.531-04:002013-08-26T14:05:57.531-04:00I realize that I'm oversimplifying with this c...I realize that I'm oversimplifying with this comment but here goes, it seems that you are evaluating an approach producing a bell shaped asset allocation curve with the heaviest allocation to bonds occurring the year of retirement as opposed to the linear allocation one would see with an "age in bonds" approach. This is a very interesting concept. I think there is potential value to this approach if inflation risk during retirement is a major concern.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-38103084317463902462013-08-17T09:57:00.389-04:002013-08-17T09:57:00.389-04:00I have carefully read all of the posts associated ...I have carefully read all of the posts associated with this study. This study is not representative of SPIAs (plural sense) rather it is representative in a (singular sense) "life only" SPIA. The inventory of SPIAs (plural sense) are very broad and the combinations that can be used to provide sustainability income solutions when properly designed in combination with traditional investment allocations, can create some of the most efficient retirement income plans, not only for sustainable income but also the opportunity for growth with greater "unfettered" and truly FREE liquidity than is originally perceived. These efficient solutions however require the architect of the retirement design to fully understand and comprehend the entire inventory of SPIA product design and allocation. The "life only" version of the SPIA is the least used option, unless utilized in combination with an arbitraged life insurance policy, and the one option type I see most often used for such research papers which often compare such "life only" SPIA feature to a traditional SWIP strategy (SWIP... aka assume and consume strategies). However, our retirement income research lab, which is devoted to the case design of current live client "real world" fears and concerns, when architecting such plans we must develop plans that address all aspects of sustainable lifetime income, inflation, liquidity and opportunity for growth of the portfolio. Each case of course depends on the client's health and family history, goals and fears. It is important to consider tax, fee-drag (expenses) and inflation when testing the "gross" income requirements over time. I can surely tell you that when all of these factors are fully considered and ALL available SPIA and DIA (deferred income annuity) income annuities are included in the inventory of product allocation used in concert with traditional bond and equity investments options, SPIAs and DIAs provide both un matched predictability and sustainability of of income while addressing the risk and possibility of dying too soon. When I say entire inventory of income annuities, I mean, period certain, reverse period certain (non-death benefit PC), installment and cash refund, cola adjusted options, living and death benefit commuted value options. Once the actual goals and fears of the client are known, only then can you properly design the most efficient retirement plan. Lastly I can tell you the "pure returns of today's SPIAs we are using in a properly designed way, are producing real and implied rates of 3.5% - 4.5%. When calculated based on tax-exclusion effect, no fee-drag of the dedicated assets and built-in inflation of 3% - 4%, the nominal real or implied returns are in the 5%+ range which is unfettered to market risk, investment defaults and uncertainly of traditional investments used without the incorporation of the secure income base provided by the income annuity sources.<br /><br />Thanks,<br /><br />Curtis Cloke<br />CEO<br />Thrive Income Distribution System<br /><br />Thrive provides an agnostic approach to the education and engineering design for retirement income solutions, providing expert consultative services to agents and fiduciary advisors for retirement in income designs that consider all investment asset classes and guaranteed income insurance product allocation options that focus on a Glidepath for a proper blend of 1) Secure Income, 2) Protected Assets and 3) Long-term Alpha Growth. Thrive was established in 1999 by fiduciary retirement income planner, Curtis Cloke. Software tools were later developed and designed in 2009 by partner and actuary, Garth Bernard, a former actuary of MetLife and the software development team of, Spencer Dillard, Chief Coder/Engineer and Leslie Prescott, Chief Market Officer, both formerly of Fund Quest. <br />Anonymoushttps://www.blogger.com/profile/07401826298203326451noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-27740381956633260502013-08-02T06:23:23.039-04:002013-08-02T06:23:23.039-04:00This is so good and effective research. more usefu...This is so good and effective research. more useful for all traders in any segment......<br /><br /><a href="http://www.trifidresearch.com/stock-tips.php" rel="nofollow">Equity-tips</a>Rahul Solankihttps://www.blogger.com/profile/07173361683672807062noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-40375124341057485492013-07-28T17:47:04.114-04:002013-07-28T17:47:04.114-04:00Wade,
While I have immense respect for both you a...Wade,<br /><br />While I have immense respect for both you and Michael and the American College, I believe this research will have some very negative unintended consequences. We have finally convinced almost the entire world that you MUST at least cover your basic expenses with Guaranteed Lifetime Income. The Wirehouse community which fought this for years is now 100% on board. I never hear any questions of SHOULD a person annuitize (that is now a given), the questions I receive is HOW MUCH and WHEN?<br /><br />Now your research will put doubt into some people's minds. Advisors will second guess the OVERWHELMING research that says you should annuitize a portion of the portfolio.<br /><br />See, regular people are not rational - they still buy high and sell low, they still panic when the market crashes, they still underestimate inflation and overestimate stock market risk, they will still suffer from dementia as they age. None of your research will change any of that.<br /><br />To think that an average person can invest just right, liquidate the right amount from the right place at the right time and do it for 30 or 40 years is totally unrealistic. Grandma Johnson will not be able to do this. And if she tries she will likely have a very bad outcome.<br /><br />The perfect portfolio in retirement is one that is SIMPLE and GUARANTEED:<br />1. Cover basic expenses with Guaranteed Lifetime Income 2. Optimize the rest of the portfolio to protect against inflation 3. Have a Long Term Care Insurance policy 4. Have permanent Life Insurance for Legacy<br /><br />That is the message we should be drilling. There are 78 million baby boomers who need to hear THAT message. Not that they might be able to do as well, if they don't live a long life and invest just right. Yes, your research is fine for academics to banter about. But it is NOT for the average retiree. I hope you address that in your final release of the research. Otherwise, I believe your research will be misquoted, and misrepresented by financial advisors who have other agendas and it will be the American people that will suffer.Tom Hegna CLU, ChFC, CASLhttp://www.tomhegna.comnoreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-80208883341335194262013-07-26T22:45:14.227-04:002013-07-26T22:45:14.227-04:00I see two typos, I meant:
I would be uncomfortabl...I see two typos, I meant:<br /><br />I would be uncomfortable providing any direct adviceAnonymoushttps://www.blogger.com/profile/04168922717655562721noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-23822677754567704222013-07-26T22:43:57.058-04:002013-07-26T22:43:57.058-04:00Thanks everyone for comments. Michael and I are w...<br />Thanks everyone for comments. Michael and I are working on some revisions to get magnitude of failure incorporated. I'll respond to your great detailed comments as we make progress in this regard.<br /><br />About your question... it's hard to come up with advice based on such very limited information. At least there is one essential detail that is missing: how much spending are you trying to support through portfolio withdrawals? But still, even with that knowledge, I would be comfortable providing any direct advise, except that I still think partial annuitization can play a useful role in protecting against longevity risk, and you are now getting into the age range when partial annuitization can be most effective.Anonymoushttps://www.blogger.com/profile/04168922717655562721noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-70487008342559410232013-07-26T18:04:49.557-04:002013-07-26T18:04:49.557-04:00I am 75 years old, still working
My wife is 70 yea...I am 75 years old, still working<br />My wife is 70 years old retired<br />No debt<br />own home<br />1 million savings (75% fixed (bonds, govmt, corporate) and 25% equity..Do you recommend partial annuity ?<br />Like to sleep at night !<br />Comments appreciatedAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-7803466597773164862013-07-25T21:15:35.463-04:002013-07-25T21:15:35.463-04:00This is an interesting and provocative article. Th...This is an interesting and provocative article. Thanks for the deep thinking, Wade!<br /><br />Some thoughts/reactions:<br /><br />1. In your paper, you assume a perhaps unrealistic overall real return of 1.54% for inflation-adjusted SPIA's, although the top of the yield curve for 30-year TIPS is currently 1.35% and the yield for 10-year TIPS is around 0.40%. Similarly, your assumption of a 4.49% nominal return for fixed SPIA's is very high in relation to today's available SPIAs, where even a 4% internal rate of return is hard to find.<br /><br />2. If you are going to value the annuity income stream from a SPIA portfolio in terms of the present value of the remaining lifetime income, are you also willing to incorporate the Social Security income stream into your analysis? If so, how might that alter your conclusions?<br /><br />3. You portray the early years of retirement as ones where there is an elevated sequence-of-returns risk and the latter years as ones where an increasing proportion of assets in stocks is appropriate. However, suffering a large loss from a stock-heavy portfolio in very old age could be one that cannot be recovered from -- just around the time that expensive health events become more likely. I question the wisdom of encouraging a stock-heavy portfolio in very old age unless leaving a bequest is the main objective.<br /><br />4. There are psychological and behavioral elements that could use attention. For instance, people often buy SPIAs for peace of mind-- so they are not so psychologically captive to volatile markets. How do you put a value on sleeping well at night, worrying less about returns and accumulations, and avoiding regret about investment decisions? Given that the pain of losing a certain $ amount tends to greatly exceed the joy of an equal $ gain, I submit that encouraging a larger proportion of volatile investments (i.e., stocks) as one ages may be a catalyst for unhealthy emotions, especially if a person is unlikely to live long enough to recover from a large market drop.<br /><br />5. Is there a place in your analysis for individuals who wish to hold no equities at all -- and perhaps only bonds? This would be useful for people who have more assets than they need to retire on and deliberately choose to dial back on volatility or risk with their investments.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-80464735694116624012013-07-25T13:50:48.122-04:002013-07-25T13:50:48.122-04:00Thanks for a very thought provoking article.
The ...Thanks for a very thought provoking article.<br /><br />The biggest weakness I see is the singular focus on failure percentages without considering the magnitude of failure.<br /><br />Here is an extreme example. Imagine a person wants a retirement lifestyle of and inflation adjusted 5% of their portfolio. And lets assume that a rising equity portfolio has an 80% chance of success. We can compare this to using all the money to buy a inflation indexed immediate annuity which let's assume pays 4.5%. Clearly this second option has a 0% chance of success since it will never be able to support 5%.<br /><br />But what does failure look like for each of these scenarios? In the first one failure could mean a lifestyle drop of more than 50%. In the second one, while failure is guaranteed, the worst case lifestyle drop is only 10%. At this point it is clear that one is not necessarily the slam dunk choice the success percentages might lead one to believe.<br /><br />If you want to use a single metric, you probably want to use something akin to expected shortfall of utility - chance of shortfall x amount of lost utility (amount of loss plugged into utility function that takes a loss aversion parameter).<br /><br />Other thoughts that came to mind.<br /><br />* What happens if you keep allocation constant through buying additional SPIAs as person ages (e.g., when stocks become more than 60% of the allocation "rebalance" by buying additional SPIA - realistically this becomes problematic 85+). This would actually be a more traditional following of the bucket strategy.<br /><br />* How does using a immediate variable annuity for the stock portion change things?<br />Anonymoushttps://www.blogger.com/profile/12054328984403636962noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-41074168587874720552013-07-25T01:42:06.309-04:002013-07-25T01:42:06.309-04:00Wade, thank you for the follow-up.
First, related...Wade, thank you for the follow-up.<br /><br />First, related to Anon's comment below, I didn't find a clear definition of what "failure" meant in the paper. I assume it is the inability to generate income consistent with the initial 4.5% withdrawal rate (annually increased for inflation?). If this is true, then failure in the scenario without the SPIA would literally mean that the money had run out without hope of any more in the future. For the SPIA scenario it would mean a continued income at some level less than was previously possible but definitely above zero. The state of 'failure' of these two scenarios represent very different situations. In other words, both situations may have hit the floor, but the floor is at a different height in each situation.<br /><br />Let me know if I completely misinterpreted the simulations.<br /><br />To clarify my original second question: the point I was wondering about was whether you were going to address what introducing the ability to rebalance when less than the entirety of the bond portion is annuitized does to the success of the portfolio. From your response, it sounds this will be addressed in your increasing equity glidepath paper.Scott Frazeehttps://www.blogger.com/profile/03741858651045420755noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-68764028237888665252013-07-24T21:42:44.470-04:002013-07-24T21:42:44.470-04:00Hi, you are right. When we revise the article, we ...Hi, you are right. When we revise the article, we will make more clear that a limitation is that we only look at probability of failure. <br /><br />I think the best way to deal with this will be to include rising equity glidepaths in the efficient frontier article I wrote before and see how they look. I will try to do this sometime soon.Anonymoushttps://www.blogger.com/profile/04168922717655562721noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-12618873037794107812013-07-24T21:40:09.863-04:002013-07-24T21:40:09.863-04:00Scott, about your first suggestion, any time you w...<br />Scott, about your first suggestion, any time you want to simulate annuity purchases in the future, it will work best if you have Monte Carlo simulations that are also able to keep track of evolving future bond yields and how they relate to bond returns. I'm still working on that.<br /><br />As for your second suggestion, we can certainly consider more scenarios, but the same general patterns will keep emerging, so I probably won't pursue that too much further. We are working on another article just about rising equity glidepaths which shifts away from the SPIA question.Anonymoushttps://www.blogger.com/profile/04168922717655562721noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-75956892883036285792013-07-24T15:29:07.545-04:002013-07-24T15:29:07.545-04:00I like the paper, but it seems to me it mostly sli...I like the paper, but it seems to me it mostly slides over an issue that you have raised elsewhere. "Failure" means something quite different in the different scenarios. In the 50/50 allocation and glidepath scenarios, it means no more portfolio income. In the scenarios with SPIAs, it means only annuity income remains, which is much less damaging, especially for the inflation-adjusted SPIA (because the failure usually occurs well downstream, so the nominal SPIA has lost a good bit of ground to inflation). That difference may not matter much for very small failure probabilities, but is a major consideration for larger ones. Or have I missed something?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-55478621006149057092013-07-24T12:27:16.053-04:002013-07-24T12:27:16.053-04:00Very interesting research.
Do you plan on evaluat...Very interesting research.<br /><br />Do you plan on evaluating the effect of serial partial annuitization (e.g. annuitizing half of remaining liquid assets at 10 year intervals) as well as evaluating the annuitization of a smaller portion of liquid assets (e.g. 25% or whatever it takes to satisfy current income needs for the individual) and then rebalancing the remaining liquid assets back to a 50/50 or utilizing the implied glide path of increasing equity allocation?Scott Frazeehttps://www.blogger.com/profile/03741858651045420755noreply@blogger.com